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Patricia Annino
Patricia Annino
To Gift or Not to Gift That Is the Question
Seven factors your clients should consider.

March 17, 2011
by Patricia Annino, JD, LLM

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the Act). The Act significantly changes the federal estate tax, which impacts estate planning for many of our clients and presents significant estate planning opportunities. The biggest surprise in the new law is the ability to give $5 million of assets away now and remove those assets and any appreciation in their value from the donor’s taxable estate. In a marriage, this doubles the amount to $10 million. This law is in effect for the next two years and it is unclear what the state of the law will be beyond 2013.

This significant increase in the gift exemption adds to the donor’s ability to gift the annual exclusion of $13,000 each year and the donor’s ability to pay anyone’s tuition and medical expenses as long as payment is made to the provider.

The Act has prompted spirited discussions between the high-net-worth (HNW) client and their advisor: “Well, now that I can really give that much, should I? What are the nontax risks to making those gifts?”

Factors to Consider When Discussing With Your Client Whether to Gift or Not to Gift:

1. How much is enough?
This question is always worth discussing. Warren Buffett’s answer is, “Leave your children enough money so they can do anything, but not enough that they don’t have to do anything (Although Buffett did not leave his children the bulk of his fortune, he did leave each of them a foundation of $1billion to give to the charities of their choosing.) In my experience, the answer depends upon the individual, often changes over the lifetime of the donors has to do with their children and the economic times.

2. What strings do your clients want on the gift?
Whatever the amount, your clients must decide how much control there  is over the gift. Is it to be given outright? In trust? Who is the trustee? How long should the trust extend? What are the terms of distribution? Who are the permissible beneficiaries?

3. Should your clients leverage the gift?
In addition to the strings that your client may want to impose on the gift, they should also address leverage. If they make a gift that is eligible for a minority or marketability discount, that increases the value of the gift by at least 20 percent. If your client funds an irrevocable trust and anticipates that the trustee will use the funds to make annual life insurance premium payments, then significantly more may be added to the trust through leverage than if the gift were to be invested along more traditional methods.

4. Is your client willing to assume the risk that the gift, once given, is gone?
What if the donee becomes divorced or has creditor issues during the donor’s lifetime and the gift is jeopardized? Can your client live with that consequence? The cascading effects from a gift can have far reaching consequences. For example, if the donor parent gifts 20 percent of the stock in his closely held business to their children; and one of the children becomes divorced, it is not just that the child’s interest in the business may be vulnerable. Even if it is not vulnerable, the divorce court also has the right to order the valuation of the child’s interest in that business. To do that means valuing the business in its entirety; and having that asset valued in a hostile environment in which the ex-in-law’s lawyer will try to value that as high as possible and will in all likelihood be in direct opposition to the donor-parent’s valuation and appraisals for estate-planning and transfer-tax purposes. In addition, if the donee-child is ordered to pay alimony or child support, then the income from the gifted asset will be taken into account when the court establishes the dollar amount. If the income is phantom income, which the child donee does not actually receive, that can present additional complications and litigation.

5. Are your clients willing to give up the “fruit as well as the tree”?
In most cases, the fruit and the tree — meaning the income and the principal — go hand in hand. For example, is your client ready to give away 20 percent of the underlying asset, knowing that the corresponding 20 percent of the income that is attributable to that asset will also no longer be available to the donor/client?

6. Has your client considered gift splitting?
Gift splitting is when one spouse makes the gift and the other gives consents to that gift, which is a very effective estate planning technique for the second-marriage couples. Frequently, in such cases, one spouse is wealthier than the other. If the less wealthy spouse does not have $5 million of assets in their own right, then using the less-wealthy spouse’s $5 million exemption in full or gift splitting, with the wealthier spouse giving his/her assets to their own children can be a very creative technique. In effect, it doubles the amount that can be gifted. When considering this technique, especially if there is a prenuptial agreement or postnuptial agreement in place, care should be taken to protect the estate of the less-wealthy spouse who consented to this gift or allowed the use of their $5 million exemption. The possibility that the exemption could decrease later, resulting in additional estate taxes in his/her estate to their beneficiaries, should be thought through and discussed.

7. Should your clients gift more than the $5 million/$10 million exemption and incur the 35-percent gift tax?
For many very wealthy clients, this is a question to consider seriously. The gift/estate tax rate has not been this low in eight decades. The difference between a tax exclusive gift and a tax-inclusive bequest is significant at the higher dollar levels and exploring this (especially if the underlying assets have significant growth potential or discount opportunities) should be an option.

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Patricia M. Annino, JD, LLM, a nationally recognized authority on estate planning, received the Boston Estate Planning Council’s “Estate Planner of the Year” Award in 2007. She chairs the Estate Planning practice group at Prince, Lobel, Glovsky & Tye LLP. She has been voted by her peers as one of the Best Lawyers in America (trust and estates), a SuperLawyer and a Top 50 Massachusetts SuperLawer. She is a Fellow of the American College of Trust and Estates Counsel (A.C.T.E.C.)

* The AICPA’s PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter apply to become a PFS Credential holder.