End of Year Strategies – Lifetime Gift Tax Exemption

As 2012 comes down the home stretch, many strategists are focussing on the tremendous tax planning opportunity provided by the 2012 Lifetime Gift Tax exemption amount of $5.12MM. Every where you look you see articles and information that call this the best opportunity for end of year planning. So why have some clients been hesitant to act? In my opinion it is because as advisors, we are not doing a good job in explaining the concept. We are doing a terrible job in overcoming the objections to the idea that we are hearing from our clients. The idea is simple – the Lifetime Gift Tax Exemption is currently at $5.12MM and in January it will revert back to the $1MM. Now is the time to act.

Clients may be hesitant to act for various reasons. Some parents may be concerned that their children are not equipped to handle large gifts. While others just may be hesitating because the current economic climate has them worried that they may outlive their assets. No matter the reason,  the discussion between you and your client needs to happen. Here is what happened when I had the discussion with one of my clients. (names have been changed to protect the innocent)

Joe and Mary met with me to discuss their Estate Plan. We had met in 2009 and had a similar discussion and review. At that time we began a gifting strategy where we decided that since they were young (in the early 60’s) they could realistically reduce their estate by giving gifts each year to their 4 married children. This had been working well and they had been following this path. For some background, Joe & Mary have an estate that is valued at close to $12 million with a good balance of assets invested in real estate, the stock market, muni bonds and annuities. The gifting that they were doing was coming from their IRA’s as we had identified those assets as the most highly taxed assets and we wanted to spend those down first. At our meeting this time, we did a projection that still showed a significant Estate tax based on current projections and life expectancy tables. So our strategy needed to be “ramped up” if we were going to help minimize the future tax liability. Discussions centered around Life Insurance as an answer and as most planners know that solution is always the cheapest way to fund for future tax liability. Once we finished that discussion, I transitioned into the idea of the gifting strategy and our window of opportunity provided by the 2012 Lifetime Gift tax exemption of $5.12MM.

At first, Joe was reluctant. He was uncertain about if they could afford to make this move and was not sure they had enough time to act before the end of the year. Mary seemed more positive but she voiced the opinion that the idea of giving up control of the asset scared her. These types of objections and hesitancy are common. At this point I took the time to explain the power of using a Trust and the flexibility that a Trust can provide in reaching their goals. We focussed on their property because their plan for their vacation house in La Jolla was clear. They wanted to leave the house for their kids and grandkids to have and use for whenever they wanted. The house, which was worth $2 million was already paid for and the kids and grandkids already used the house often and enjoyed family gatherings there. By setting up a Trust, and gifting the property to the trust Joe and Mary could avoid gift taxes and get immediate relief on their estate value. In addition, the trust agreement can provide indirect access to the trust assets for Joe and Mary and give them the ability to control the asset without ownership. This idea made sense to them but Joe was still concerned about the timing and getting it done by the end of the year. It was then I explained to Joe that the precise valuation of the property did not need to be determined until prior to filing the gift tax return in April of 2013. Yes, we needed to gift the property by December 31, 2012 and yes we needed to get the Trust in place prior to that date, but those things could be done relatively quickly and prior to the end of the year.  The story has a happy ending as Joe and Mary moved forward. The Trust was written and the gift was made. The immediate impact on their future tax liability was easy to show in the projections. At the same time we were able to get the life insurance in place to fund for the potential estate tax. Everyone is happy.

For Joe and Mary, the process was typical. Their reluctance was because they did not understand the process or the concept. The idea of gifting but retaining control is easy to explain and makes sense for many of our clients. Who do you know that is hesitant to act but should? Who can benefit from a better understanding of the Gift Tax Exemption and how it can help them now? Make a list of your top clients and give us a call. We can help you understand the concept and provide you the tools to make this happen.




About Jeffrey Berson

40 years in and around the industry has made Insurance a part of my DNA. I have had the pleasure of working with and for some of the greatest minds in our industry. My "Bersonal" View is an attempt to capture some of the best ideas, the best concepts and the best practices in a way that can lead to success for others. It will certainly be my point of view, so please...don't take it "Bersonal".
This entry was posted in Bersonal Posts. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s