This is the third article of a series designed to provide guidance for those individuals who are considering making a large gift in 2012 to take advantage of the $5.12 million federal gift tax exemption that will expire at the end of the year. For the first two articles in the series, see Part 1: Use It or Lose It and Part 2: Can You Afford to Make a Large Gift?
If you plan to make a gift this year, there are three competing factors you need to evaluate relative to the timing of your gift. First, the sooner you make the gift, the sooner the donee can receive income and appreciation from the gift. Second, Tennessee gift taxes may be repealed. If you make the gift now, you would be sorry if Tennessee gift taxes are repealed for gifts made later this year. Third, we don’t know for sure that the $5.12 million federal gift tax exemption will remain intact for the remainder of the year. Therefore, waiting for a potential change in the Tennessee gift tax laws or for other reasons carries some minor risk that the federal law will be changed before you make the gift. You may remember a rumor last year that caused some of our clients to make their gifts prior to November 23, 2011.
The benefit of making the gift sooner rather than later has been recognized by a couple whom I assisted with an $8 million gift last fall. They have received the 2011 Tennessee gift tax bill from their CPA. It is approximately $737,000. Ouch!
About the time they received their gift tax returns, my clients heard the rumor that Tennessee is considering a repeal of its gift taxes. They were somewhat disappointed that they had not considered delaying their gift, though no one had any idea that Tennessee might repeal its gift taxes during 2012 when my clients made their gifts. However, a closer analysis showed that the family will be considerably better off by having made the gift last fall even if Tennessee repeals its gift taxes. The gift constituted interests in an LLC that primarily owned marketable securities. Due to extraordinary returns in the stock market, the value of the gift has increased from $8 million to $9.2 million, or an increase of $1.2 million. If Tennessee repeals its gift taxes later this year and my clients had waited until that time to make an $8 million gift, the trust for their children would only have $8 million rather than $9.2 million. Especially since the trust is a grantor trust, the extra $1.2 million is likely to increase more between now and the time of death of my clients. If my clients had waited to make the gift, they would have received the $1.2 million of income and appreciation, and they would not have paid the $737,000 of gift taxes. Thus, their personal net worth would be $1,937,000 larger. If you assume a 40% death tax rate on this $1.9 million at the time of the death of the survivor of my client, the children will end up in about the same place. However, this does not take into account the additional earning power of the trust for the children having $9.2 million as compared to having $8 million. This could provide a substantial benefit between now and the time of death of the survivor. Even though my clients’ timing may have been too quick due to Tennessee gift taxes, it was just right from the point of view of appreciation. This was not an accident. My clients suspected that stocks might be poised for a rally when they pulled the trigger on their gift.
The current advice that we are giving is to wait and see if the Tennessee legislature makes a change to its gift tax laws. We expect to know the answer by the middle of May. Meanwhile, there does not appear to be any movement at the federal level to repeal this year’s large federal gift tax exemption. This advice changes for clients who are able to make gifts that do not require the payment of Tennessee gift taxes and for clients who have an asset that may appreciate rapidly in the next few weeks.
When it comes to making a large gift, timing is everything. If you are ready to make a large gift, you should be making preparations but should consider delaying the gift until the Tennessee legislature concludes its legislative session for this year.
When we interviewed Donald Trump a couple of weeks ago, he told us that NOW is a great time to get into real estate – and he specifically pointed to houses.
Optimism can only be rewarding if one takes action. Without it, it’s like driving a car that runs out of fuel; you’ll never arrive at your goal. Your past mistakes or apprehension about the future has nothing to do with what you can do today or what you should act upon. Decision-making may be risky but there are great results if it is coupled with a conscious effort to do what is right.
An IRA also has its own set of benefits.
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