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

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