In an interview for Standard & Poor’s Market Scope Advisor, estate planning expert, Gary Altman, Esq., comments on the pros and cons of various gifting techniques:
Comments by: Gary Altman, Esq., President and founder of the Maryland-based estate planning law firm, Altman & Associates, and Chairman of the National Capital Area Financial Planning Association.
- Is there an active campaign to get clients to consider gifting strategies? Why or why not? If so, how do you approach a client to start a conversation on the topic? What are some issues clients raise with regard to considering gifting over inheritance? Is it the perceived complication of creating a gifting plan, the costs, the entire estate planning process, etc .? In the past 2 years, more and more clients have been interested in advanced gifting strategies. There is always a tradeoff between saving potential estate taxes and the complexity of many estate planning gifting strategies. I always start with the concept that it is simpler to purchase life insurance to replace the tax rather than create a complex gift tax technique to avoid or minimize estate taxes. However, when clients come to me with an asset that will explode in value, I try to get them to do a GRAT or other advanced trust concept to remove the appreciation from their estates.
- Do you or your firm apply a rule of thumb when it comes to inheritance vs. gifting? Is there a dollar amount? ($2 million cost basis/original value because of the estate tax implications, right?) How about capital gains on appreciated assets? Unless someone is going to be subject to estate taxes, we do not recommend gifting for estate or gift tax purposes. Hence, unless a single person’s assets exceed 2 million or a married exceed 4 million, we will not recommend any gifting. Even if a client is over these amounts, we will first try to see if we can achieve some valuation discounts by fractionalizing assets before we will discuss gifting.
- When does gifting or inheritance typically come into the planning discussion? At the time a will is made or adjusted; after a discussion about succession or estate planning with family? When one is ready to retire or another life event? What’s the catalyst for most folks? Usually when they are doing estate planning or reviewing a plan or when an asset is likely to increase significantly in value or when they are going to sell an asset.
- Is there just a general lack of interest or education about it at the client level? No, not with my clients, it is part of the natural evolution of estate planning.
- Gifting and all the options afforded by this type of planning are daunting for most folks who meet the minimum requirements. So, how many professionals are typically needed by the donor to executive a good gifting plan as opposed to those needed to dole out inheritances. Usually an estate planning attorney and either a CPA or financial planner who can show the client that even with making a gift, they will have more than enough for their own retirement. However, again, the first priority is the client and making sure that he/she/they feel comfortable with what they are going to accomplish.
- Any other benefits of gifting versus inheritance for the donor? Gifting allows the donor to see how the donee will react to receiving money. Also will allow the donor to see the donee enjoy the money. How about for the recipients? Recipients love gifts, no taxes to be paid, just pure increase in assets. Any potential pitfalls that folks should know about? Some of the turn offs for donors include the language that tends to be spoken around such a topic i.e. CPA talk and lawyer’s legalese.
- Would you be able to give us examples of investment portfolios of folks in the so-called “gifting stage?” Many of the strategies employed have to do removing risk from assets or portfolios, right? Wealth preservation and asset protection? Value investing? What kind of allocation are gifting-stage folks looking at? Percentage between cash, bonds, stocks, and other assets (home, business, etc…) This is a hard question, it starts backwards. Our clients tend to have a goal in mind, either reduce estate taxes or I need to get this child this amount of money NOW. We then look at their assets and determine what is the best way to accomplish the goal. It is always easier to give an asset that you do not need for retirement, such as undeveloped land, or stock in a closely held company. Two recent situations come to mind. I have a client who helps to support his daughter. He is about to run out of gift exemption and in a year or two he will be subject to gift tax. So, we decided to create rolling GRATS to hopefully get some appreciation out of his estate which would be used to substitute for his gifts to this daughter. If it works, we reduce his estate and do not incur any gift or estate taxes. We are taking all of his equity investments and putting them in one GRAT and taking all of his bonds into another. Due to the valuation, the bonds actually will return enough so that we will beat the actuarial number. Another client wanted to give his girlfriend enough money so that she did not have to work. We had no gift tax exemption left. So, he was involved in a closely held speculative investment that recently sold interests to third parties. We sold some of his interest to a trust which would pay him back in a few years and any amount about the purchase price would be used to give to the girlfriend. The investment tripled in value and we were able to give the girlfriend the needed money without any gift and estate tax consequences.