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What to do if you haven’t gifted away enough money

I’ve been hearing this question in various circles from lawyers and laymen alike – Was it a mistake for people to make big gifts in 2012? 

The reason they are asking this question: 

The Senate and House approved the “American Taxpayer Relief Act of 2012″ last night in an effort to keep our country from going over a “fiscal cliff.”  As part of that deal, Estate and Gift Tax exemptions that were set to drop from $5.12 Million to just over $1 Million, are now preserved “permanently.” That is, one of the chief motivators for people to make gifts in 2012 has turned out to be a false alarm.

Senate Vote on the Fiscal Cliff

Nothing like a lively Senate Debate on important issues.








So now people are asking if Estate Planners and tax attorneys jumped the gun by encouraging people to plan before 2012 came to an end.  Did the crystal ball malfunction? Was bad advice given as a result?

In almost all cases, the answer to these questions is a resounding “no.”  In this article, I’ll give four reasons why the answer is no, and I will discuss what someone considering making a gift should do.


1. Estate tax rates, Gift tax rates, and Generation-Skipping Transfer tax rates will remain the same – until they change.

For the first time in the past several years, there finally appears to be some “certainty” in the Transfer Tax regime.  While the “applicable exclusion” (the amount exempt from estate and gift taxes) has now been made permanent and pegged to inflation, no one can predict if and when Congress will change its mind.  A law is only in effect until it is changed or modified, and – you should know – our legislators LOVE tinkering with the Tax Code.


2. The “Estate Freeze” and the rule of 72.

When you make a lifetime gift, whether in a trust or outright, the gift is taxed at Fair Market Value at the time you make it.  The result? Any increase in the value of the gift is not included in your estate, and it is not subject to additional gift and/or estate taxes. 

You may have heard of the rule of 72.  If not, here’s how it works:

Take the rate of interest that you expect to earn on a particular asset over time.

Divide that rate by 72.

the number you get is (roughly) the amount of years it will take for the value of that investment to double.

Let’s say you expect to earn a steady 7.2% on $5.12M.  In 2012 you decided – with the right advice – that you could give those assets away and still live comfortably, so you make a gift in trust for future generations.  In 2022, with no distributions, those assets will have doubled (7.2 /72 = 10 years).  Assuming this was the first taxable gift you made during your life, you took full advantage of your lifetime exclusion from transfer tax, and now your heirs now stand to inherit $10M+ transfer tax free

Nice, right?


3.  “Tax exclusive” v. “Tax inclusive.”

Another major benefit to making gifts during life is that any transfer taxes paid more than 3 years before the date of death are excluded from the value of the estate.  This means that even if you have used up your applicable exclusion in 2012, you can still make gifts that your estate will benefit from going forward.


4. Asset protection

So you made an irrevocable gift in 2012.  That’s a good thing.  If you had a decent estate planning attorney, I’m positive that some layer of asset protection was included in your plan.  First, the obvious: your creditors can’t reach what you no longer have access to.  If you made a completed gift, those assets are almost always unavailable to anyone who decides to sue you (but please speak to a qualified attorney to make sure this is the case). 

Second, your beneficiaries: if you made lifetime gifts by utilizing a trust, there’s a good chance that asset protection for your beneficiaries was included in the plan.  That means if they get sued they won’t be at risk of losing the proceeds of your generosity. 



I said 4 things, but here’s a 5th.  Tax rates DID go up.  Paying 5% less in gift tax is never a bad thing.



But, here’s the thing. I believe strongly that at the end of the day, the goal of “estate planning” isn’t (or shouldn’t be) about minimizing taxes.  Of course, any competent estate planner will consider tax implications when designing and executing a plan.  But that’s not really what you are after – is it?  People generally don’t decide to do an estate plan because they want to keep their hard-earned money out of the hands of an incompetent government.

Why do people plan?  They plan for peace of mind.  They plan to rid their world of potential uncertainties.  They plan to provide for their families.  They plan so that they decide what their money should be spent on, whether or not they are still around to express and control their wishes.  It’s about family.  It’s about love. It’s about what you care about. Getting hung up on the IRS estate and gift tax rates can distract you from what is most important. 

So when you are thinking about making a gift to loved ones, or to a cause you care about, your concern isn’t really taxes at it.  There’s a LOT more to it than tax planning.  It really comes down to successfully doing what you want with your money, and doing it as effectively as possible.  It’s never too late to plan, until it is.




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