gift taxes

Wealth Matters: As End of Gift Tax Exemption Nears, Ways to Use It Proliferate

December 14, 2012 by NewsMaker Leave a Comment

Back in December 2010 President Obama and House Speaker John A. Boehner reached an agreement to raise the exemption levels on estate and gift taxes to $5 million a person as part of a deal to extend the Bush-era tax cuts. (This year, that rate was adjusted upward for inflation to $5.12 million.)

As I have often written, this was an amazing giveaway to the superrich. But it also provoked anxiety among those at the next level down — the merely very rich — for whom giving away as much as $10 million a couple, to avoid higher taxes when they die, was not as simple a matter. The gifts represented a larger percentage of their net worth.

Now, with a little more than two weeks left in the year, tax lawyers and advisers say the wealthy are scrambling to make gifts before the exemption expires.

“We are having this come up daily,” said Mitchell A. Drossman, national director of wealth planning strategies for U.S. Trust. “One of the first things I’m asking is, ‘Why are they warming up to this idea now? Is it that they didn’t want to make the gift? They didn’t know how? They didn’t get around to it?’ ”

With so little time left, advisers have come up with quick and easy ways to get the gift done for tax purposes this year.

A simple solution is to forgive any loans made to family members. This is a fairly painless way to use up some of the gift tax exemption because most parents never expected their children to repay those loans and would have forgiven those loans at death anyway.

While giving cash outright is easy, few wealthy people want to do that. The exemption may be at a historically high level, but the wealthy still want to give assets that will continue to grow.

Leiha Macauley, a partner and head of the Boston office at Day Pitney, says one solution is to set up a trust that allows someone to put in cash now and exchange it for other assets in the future, when the person has had enough time to have the assets properly appraised. Using the so-called power of substitution means that cash can become just about anything else next year.

“The power of substitution is key when we’re so pinched for time,” she said. “Appraisals are not coming out quickly enough. And people giving right up to the limit makes us nervous, because what if the appraisal says something is worth $6.2 million and then the I.R.S. says you owe tax?”

Typical assets that people swap in later include a home, which they then rent back from the trust, or a large life insurance policy, which can be purchased with the cash. But Andy Katzenstein, a partner in the personal planning department at the law firm Proskauer Rose, said he had clients ready to swap more nontraditional assets into trusts. One has a collection of Ferrari sports cars, while another couple has art that is valuable but that they no longer like displaying in their house.

These assets also have the virtue of being relatively painless to part with. The man with the Ferraris can pay the trust rent when he drives one of the cars. (The rent further reduces the estate’s value.) The couple with the art already had it in storage.

But Mr. Katzenstein cautioned those choosing this option to know the law, particularly if they plan to keep using these assets. “The devil is in the details,” he said. “If you don’t follow the rules you get into trouble. Make sure you have a real lease, you pay the rent every month and it also has to be fair market rent.”

Mark E. Haranzo, a partner at the law firm Withers Bergman, said he had suggested to clients with private companies that they use the cash as essentially a down payment on a loan to put all or part of their company into a trust for their children. He said the general rule of thumb was to put down 10 percent of the value of the company and then use the company’s profits to pay off the loan.

For the really rushed, Mr. Katzenstein said, another option is to include the power to rewrite the terms of the trust next year if their lawyer does not have time to customize a trust for them before the end of the year. This is done by naming someone to the role of “trust protector” and allowing that person to rewrite the trust at a later date.

Article source: http://www.nytimes.com/2012/12/15/your-money/taxes/as-end-of-gift-tax-exemption-nears-ways-to-use-it-proliferate.html?partner=rss&emc=rss

Filed Under: Your Money Tagged With: gift taxes, tax purposes, wealth planning

Mortgages: Co-Signing a Loan

August 28, 2011 by NewsMaker Leave a Comment

But money managers and lenders caution those who are asked about co-signing against jumping into such an arrangement.

“A co-signer is really a co-borrower,” said John J. Vento, the president of the Comprehensive Wealth Management Group, a financial planning firm in Staten Island. “Unless you’re ready, willing and able to make the payments for the family member, I would recommend not co-signing for the loan.”

Indeed, if the principal party defaults on the loan, the co-signer is on the hook.

Ronald Rogé, a financial planner in Bohemia, N.Y., suggests that as a less risky alternative, potential co-signers consider providing a cash gift for the down payment. Under current tax laws, you can generally give as much as $13,000 to a person, free of gift taxes, or $26,000 per person, if a married couple filing jointly is giving the money.

“The only reason they want you to co-sign is they can’t afford the house,” Mr. Rogé said. “Make it between them and the bank” on the actual loan.

In 2010, 27 percent of first-time buyers received gifts from friends or relatives toward home purchases, up from 22 percent in 2009, according to a National Association of Realtors survey of 8,449 buyers released last fall. Nine percent received loans from relatives or friends, virtually the same number as during the boom year of 2005, the poll showed.

Those who are considering co-signing a mortgage must conduct some serious due diligence. First, you must understand why the family member or friend is asking for help. Even though it may be, say, your son or your sister, don’t be afraid to look into that person’s personal finances to help determine whether he or she will be able to repay the loan, and to peruse credit reports, which will show the track record for paying off debts.

“Take emotions out of it,” said Neil Diamond, a mortgage banker at Legacy Real Estate in Commack, N.Y. “Ask the questions you would of a stranger, as if it were an investment.”

Also, discuss worst-case scenarios before you co-sign. If your child lost her job or the mortgage became delinquent, what recourse would you have? Work out a written contract containing an agreement that you could, for example, require a sale of the property if the person you were helping was in danger of defaulting. Think about how to protect your interests in a foreclosure or loan default, Mr. Diamond said.

Other financial experts suggest you consider the family connection: how close you are to the person asking for a guarantor.

“When it gets into nephews and cousins,” said Ed Mooney, a wealth strategist with BNY Mellon in Manhattan, “it tends to be more tenuous” to agree to co-sign.

In addition to the potential for being held responsible for repaying a large mortgage if your relative or friend fell behind on payments, there are other potential risks. The mortgage shows up on your credit report, and that could affect your ability to borrow money or buy a second home. Any late payments by the principal borrower will also show up on your report — and if there are several of them, they will very likely reduce your credit score.

Yet Mr. Mooney and others say that co-signing may be inevitable in some instances, given the financial environment. So after you’ve signed on the dotted line and the person you are helping has moved in, keep regular track of that person’s mortgage payments. Request that you be copied in on statements or online payments so you know they are being made, Mr. Mooney added.

And who knows? In three years or so, your relative may have improved his creditworthiness and might even remove you as a co-signer.

Article source: http://feeds.nytimes.com/click.phdo?i=de5d2df900dac306de3e18af5d6dbc45

Filed Under: Your Money Tagged With: gift taxes, national association of realtors, paying off debts

Wealth Matters: A Trust Surges, Heirs and Taxes in Mind, but Mind the Details

July 23, 2011 by NewsMaker Leave a Comment

A feature of it that is coming back into vogue is the charitable lead trust. After parceling out specific gifts, Mrs. Onassis put the rest of her estate into one of these trusts. It was set up to last 24 years, distributing money to charity annually. Whatever is left in 2018 goes to her heirs, in this case her grandchildren.

But the resurgent interest in charitable lead trusts is as much for financial advantage as for altruism.

Since the Republicans and President Obama allowed the gift- and estate-tax exemptions to rise to $5 million per person for this year and next, there has been a rush to pass far more money than that on to heirs, free of tax. In the case of charitable lead trusts, record low interest rates are driving the trend further.

The Internal Revenue Service sets what is called a hurdle or discount rate for these trusts, which is tied to United States Treasury rates. A lower rate means the payment to charity each year can be lower, and if the assets are invested to beat that rate, the amount left over for heirs should be higher.

The confluence of these factors comes as advisers are already bombarding their wealthiest clients with ways to pass money onto heirs, with good reason: the super-rich may be living through the greatest time for avoiding estate and gift taxes in recent memory.

“What’s the biggest bang for the buck?” asked Kirk A. Hoopingarner, a partner at the law firm Quarles Brady in Chicago. “Everyone’s searching for that now. That’s why the charitable lead trust has gotten so much play.”

Banks and lawyers who reap fees from setting up these trusts are not the only ones pushing them. University development departments know the value of a steady annuity payment.

A page on Harvard University’s Web site for giving offers a primer on how these trusts benefit the university and the alumni’s heirs. Harvard also offers to handle the administration of the trust and invest the assets for the donor.

Here are some of the fundamentals of a trust that helps charities and minimizes taxes.

HOW THEY WORK Over the years, charitable lead trusts have been a way to give money to charity with the possible benefit of passing what was left to children without paying estate taxes.

What has kept people from setting these trusts up in the past — and is still causing people to hesitate — is that they are hard for someone who is not a tax lawyer to understand. “It’s too complicated for most people,” said John D. Dadakis, a partner at Holland Knight. “They’re sitting there saying, ‘I want my life simpler.’ ”

The best candidates for these trusts are people who give annually to charity and have an income large enough to take advantage of the charitable tax deduction for the entire amount put into the trust. (The federal deduction for charitable donations is capped at 50 percent of a person’s income, though it can be carried forward for five years.)

Gregory D. Singer, a wealth strategist at Bernstein Global Wealth Management in New York, said such trusts could be worthwhile for those able to put at least $1 million into them. “The downside is that money is tied up and committed,” he said. “In normal times, I’d rather remain flexible, but these aren’t normal times.”

For the super-rich, one fear is that the charitable gift deduction could go away.

THE NEW TWIST During the last period when charitable lead trusts were talked up, after Mrs. Onassis’s death in 1994, many were deemed failures. They either did not have enough money left over for heirs or, in the worst cases, they did not have enough to make all the payments to charity.

Part of the problem was the high hurdle rate — 8.4 percent in August 1994 compared with 2.2 percent for this August. (The other, of course, was the dot-com bubble burst.) A higher rate meant a larger payout and decreased the chances that there would be anything left over in the end.

Article source: http://feeds.nytimes.com/click.phdo?i=38999f0156aa9b4ff5dbb9dbcd48c734

Filed Under: Your Money Tagged With: annuity payment, gift taxes, united states treasury

Wealth Matters: A Trust Surges, Heirs and Taxes in Mind. But Mind the Details.

July 22, 2011 by NewsMaker Leave a Comment