General Advantages of Giving

Transcription

1 Gift Planning Strategies in Light of the $5 Million Exclusion Carol A. Cantrell Houston, TX A Firm on the Leading Edge of Client Service General Advantages of Giving Gifts exclude future appreciation from the donor s estate. Donors have a $13,000 annual exclusion. Assets can be discounted. Gift taxes are excluded from the donor s estate if the donor lives 3 years. Gifts save state estate and gift taxes Gifts in trust offer creditor protection, tax benefits, and flexibility. 1

2 What s Different in ? Those who used their $1 million exclusion can give $4 million more with no gift tax. Larger exclusion offers more opportunities than just GRATs and IDGTs. More breathing room on valuation discounts. Portability Life insurance trusts Disadvantages of Large Gifts Congress may change the rules. The donee takes a carryover basis in the gifted property. Gifts favor donees because estate beneficiaries are burdened with estate taxes. Large gifts may attract more IRS scrutiny. Rumors of Clawback. 2

3 Clawback Clawback is the concern that gifts made using all or part of the $5 million exclusion will cause additional estate taxes if the donor dies in a year when the exemption is below $5 million. Clawback Example Dana made $5 million of gifts in She paid no gift tax because of the $5 million gift tax exclusion. She died in 2013 when the estate tax exclusion was only $3.5 million and the rate was 45%. What is her estate tax? 3

4 Dana s Estate Tax With a $3.5m Exclusion Tentative tax on $6m ($1m estate $2,580,800 plus $5m gifts at 45%) Gift tax payable on $5m gifts (45%) 2,130,800 Less unified credit - $5m (45%) - 2,130,800 Credit for prior gift taxes Estate tax before the unified credit 2,580,800 Less $3.5m unified credit (45%) - 1,455,800 Estate Tax on $1m Estate (45%) $1,125,000 Solving Clawback Congress should amend IRC 2001(b) to clarify which exclusion amount is used to figure the credit for prior gift taxes paid or payable the exclusion in the year the gift was made or the exclusion in the year of death. 4

5 Popular Techniques in Annual Exclusion Gifts Family Partnerships Bargain Sales Reciprocal Trusts Gift to an Irrevocable Grantor Trust Qualified Personal Residence Trust (QPRT) Gifting All or Part of a QTIP Recapitalizing the Family Business Bargain Sale Donor sells property to a family member at a bargain price. Donor has made a gift equal to the bargain element, which is the difference between the fair market value of the property and the sales price. Donor reports taxable income equal to the difference between the sales price and the donor s basis in the property. 5

6 Reciprocal Trusts Suitable for happily married couples who are reluctant to make large gifts. Spouses create nearly identical irrevocable trusts for each other, giving each other a right to income and limited principal. The trusts must not be so identical as to be considered reciprocal according to the U.S. Supreme Court in United States v. Grace (1969). Reciprocal Trust Doctrine Reciprocal trusts mean that the trusts: (1) are formed at the same time and have identical terms, and (2) to the extent of mutual value, leave the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries. United States v. Grace, 395 U.S. 316 (1969) 6

7 Benefits of Reciprocal Trusts Full use of the gift tax exclusion. The right to trust income and principal. Creditor protection. Future appreciation shifts to the remainder beneficiaries. Grantor pays income tax on the trust t income. Trust can appoint special power-holders. Can allocate the GST exemption. Risks of Reciprocal Trusts IRS can include the assets in each spouse s estate under 2036 or 2038 as if the gifts were never made. Avoid this by giving the spouses different rights and powers. 7

8 Qualified Personal Residence Trust Can gift large assets at a fraction of the value. Can give a primary or a vacation home. Little or no IRS risk or challenge. Can give a discounted fractional interest. The grantor must survive the QPRT term. GST exemption can only be allocated at the end of the QPRT term. The donor must rent, buy, or move at the end of the QPRT term. Recapitalizing the Family Business Business owner creates a class of voting or nonvoting preferred shares. The donor gifts the common stock while retaining the preferred shares. This technique freezes the value of the preferred shares and shifts the appreciation to the gifted common shares to the donee. Perfectly safe if IRC 2701 rules are followed. Applies to corporations as well as partnerships. 8

9 Gift to an Irrevocable Grantor Trust Simple Can give discounted assets. Can use a large amount of the gift tax exclusion. Donor pays the income tax on trust income. Donor can give a third-party the power to make distributions to himself if needed. Formula Gifts IRS argues that formula gifts are contrary to public policy Commissioner v. Procter (4 th Cir. 1944) Gift adjustment clauses Pour-over clauses 9

10 Summary of Advice Do some hard number-crunching to be sure your client can afford to make gifts Protect your annual exclusion Use grantor trusts wherever possible Don t give right up to the gift tax limit with a discounted asset Obtain rock solid appraisals Proceed with confidence 10