Trends & Developments - Feb. 2012 - Lifetime Gifts - A Window of Opportunity

Individuals who can afford to make substantial lifetime gifts to children, grandchildren and other persons can achieve significant tax savings by doing so sooner rather than later. This is especially so because of the current $5 million gift tax exemption.

While this article focuses on the transfer tax aspects – estate, gift and generation-skipping taxes – of making significant gifts under the current tax law, anyone considering such gifts must first be comfortable with giving up ownership of the gifted property, with substantially decreased control over the gifted property, and with the impact such gifts may have on the persons receiving such property. Though ownership of the property cannot be reclaimed, the other two elements can be mitigated by the use of trusts to hold the gifted property.

The factors that make the current environment an ideal time to make gifts are as follows:   

  1. There is a $5 million ($10 million for a married couple) exemption from the federal transfer taxes. While there is some uncertainty, it is expected that this exemption amount will remain in effect only through December 31, 2012. At that point, it is likely that the exemption amount will be reduced – perhaps to $1 million ($2 million for a married couple).
  2. The interest rate the Internal Revenue Service uses in valuing certain types of gifts is at or near historic lows. This makes intra-family loans and other estate planning strategies more attractive.
  3. Many people believe that assets are currently undervalued and have growth potential, so the ability to give substantial future value is enhanced.
  4. The maximum federal transfer tax rate is presently 35%. It is anticipated that this rate will increase on January 1, 2013 – possibly to 55%.
  5. Many states, such as New York, impose an estate or inheritance tax but do not impose a gift tax.

The following illustrations demonstrate the potential tax savings of making a gift now using the $5 million exemption.  The assumptions are: 

  • Taxpayer is married and a New York domiciliary.
  • Joint life expectancy is 20 years; no transfer tax will be paid on death of first spouse.
  • Assets will grow at a 4% after-tax rate (using annual compounding)


Taxpayer gives away $5 million to his children now;
at end of 20 years, children will have (with no transfer taxes):
  $ 10,955,616 
Taxpayer makes no gifts; income and
appreciation of $5,955,616 taxed in 20 years
New York tax (16%)   $ 1,752,899
Federal tax (after deduction of New York tax)   1,470,951 
Total transfer taxes   $ 3,223,850 
Children will inherit (after transfer taxes):   $ 7,731.766 



Taxpayer gives away $5 million to his children now; at end of 20 years,
children will have (with no transfer taxes):
  $ 10,955,616 
Taxpayer makes no gifts; exemption decreases and rate increases    
New York tax (16%)   $ 1,752,899
Federal tax (after deduction of NY tax)   4,511,494 
Total transfer taxes   $ 6,264,393 
Children will inherit (after transfer taxes):   $ 4,691,223 


Although it is impossible to know what will actually happen, both economically and with the transfer tax regime, these illustrations (and related assumptions) indicate that the family of a donor who makes a $5 million gift now could achieve transfer tax savings in the $3.2 million to $6.2 million range. Obviously, the savings are substantial and anyone who can afford to take advantage of the potential savings for his or her family should take appropriate action!

The potential savings indicated in the oversimplified illustrations can even be greater through various techniques that would leverage the $5 million exemption. These techniques include:

  • Grantor Retained Annuity Trusts (GRATs)
  • Irrevocable Life Insurance Trusts (ILITs)
  • Intentionally Defective Grantor Trusts (IDGTs)
  • Charitable Trusts
  • Family Limited Partnerships
  • Valuation Discounts


Trends & Developments - Feb. 2012

Out with the Old – SAS 70 Reports, In with the New – SOC 1, 2, & 3 Reports
Lifetime Gifts: A Window Of Opportunity
Issues to Consider in a Merchandise Licensing Program 

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