2012 Gift Giving
“Now is the time to make gifts!” “Estate planners are advising their clients to make gifts this year!” “You have to use up your $5,000,000 exemption in 2012 before it expires!”
The news seems to be filled with statements of that sort, and there will be many more in the coming months. This advisory will tell you what is behind that talk, why we recommend making gifts this year, what factors you should consider in making gifts, and the types of gifts you might want to consider.
The reason to consider making gifts before the end of 2012 is taxes. Today you have an exemption from estate and gift taxes of $5,120,000 ($5,000,000 was adjusted for inflation) and the maximum tax rate for transfers is 35%. That is scheduled to change at the end of the year, with the exemption dropping to $1,000,000 and the highest tax rate increasing to 55%. This means that although you can transfer an extra $4,120,00 ($8,240,000 if you are married and your spouse agrees) to your beneficiaries free of tax in 2012, that opportunity may disappear on January 1, 2013.
Then again, it may not. Congress may extend the current law. Or it may reduce the exemption to $3,500,000 and increase the top tax rate to 45% (the President’s proposal). Or it could abolish the tax altogether or do something different. There have been bills in Congress to do all of the above, and there are sure to be others. We do not know what Congress will do. What we do know is that if Congress does nothing, the exemption becomes $1,000,000 on January 1, 2013, and the top tax rate will go to 55%.
Should you make a gift this year? As a basic rule, gifts are always a good way to transfer property. They are the most tax efficient way to transfer property, for several reasons. Gifts are tax exclusive; transfers at death are tax inclusive (that is, the gift tax is imposed only upon the value of what is transferred, while an estate tax is imposed upon the total of both what is transferred to the beneficiary and what is paid to the government as tax on the transfer). Second, many states impose an estate tax; very few have a gift tax. Third, appreciation in the property occurring after the gift escapes transfer tax. Finally, the beneficiary usually gets to enjoy the gift now, rather than having to wait until the death of the giver.
Is there a downside to a gift today? The basic downside of any gift, today or at any time, is that you could at some time in the future want to have back the property that you gave away. (Remember, a gift is a permanent relinquishment of your rights to property). Although there are ways to give away property and still enjoy some benefit from it, you basically should not be giving away property if you are likely to need it someday.
There are two other things to consider when thinking about any gifts. The recipient of a gift takes your income tax basis in the property; a beneficiary under your will takes a basis equal to the value of the property at your death. Thus it is more beneficial to give high basis property, if possible (the recipient of a gift of $1,000,000 of zero basis property may in effect only receive less than $800,000 of spendable value, depending upon her federal, state and city capital gains taxes).
Further, you want to give assets that are likely to appreciate. (It would be a shame to give $5,120,000 of property to your beneficiary today, and then to die two years from now when the exemption perhaps is still $5,120,000, but the property is then only worth $2,000,000). As we all have learned so painfully, property values can go down.
What kind of a gift should you make? There are numerous ways to make gifts. You can transfer stock or cash or art or real property or any other form of property outright to your beneficiaries, or to a trust for their benefit. You can create an LLC or a limited partnership or other entity whereby your spouse or someone else controls the investment and distribution of the assets transferred.
You can leverage your gift by using a grantor retained annuity trust (a “GRAT”) where you are essentially only giving away appreciation, or by selling assets to an existing grantor trust (or one that you create for the purpose), taking back a note at the remarkably low current interest rates (less than 1% in September 2012 for a 9 year note) so the appreciation passes outside of your estate to the beneficiary of the trust.
If you are thinking of making a gift but are concerned that you are not ready to do so because you might need the property, you can transfer your residence (primary or secondary) to a Qualified Personal Residence Trust (a “QPRT”), retaining the right to live there for a period, and leveraging the gift. You can also transfer income producing securities and other property to a trust for your spouse and descendants, trusting that your spouse will share the income with you if you need it.
As you can see, there are many ways to make gifts, and if you want to take advantage of the current $5,120,000 exemption from gift taxes, you should call your lawyers to discuss them.
Do not wait too long. To be effective the transfer must be completed (the deed to real property delivered, the check cashed, the shares transferred) by the close of business, December 31, 2012. If appraisals are required, you will have to start long before that.
Questions regarding this advisory should be addressed to Edmund J. Behan (212-238-8630, firstname.lastname@example.org), Jerome J. Caulfield (212-238-8809, email@example.com), Michael I. Frankel (212-238-8802, firstname.lastname@example.org), Stephen F. Lappert (212-238-8717, email@example.com), Daniel J. McSwiggan (212-238-8760, firstname.lastname@example.org), Karen T. Schiele (212-238-8667, email@example.com) Ronald D. Spencer (212-238-8737, firstname.lastname@example.org), or Theodore R. Wagner (212-238-8705, email@example.com).
Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
© 2020 Carter Ledyard & Milburn LLP.
© Copyright 2012