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The golden age of gifting is almost over: Give clients a nine month free lookArticle added by John F Elder on November 27, 2012
John F. Elder

John F Elder

Bethesda, MD

Joined: April 11, 2012
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Even though time is running out, many families are apprehensive about making a large gift before the end of the year. However, did you know that wealthy families may be able to prop the window open for nine more months even as it starts to slam shut?

The “golden age” of gifting appears to be drawing to a close. In my last article I discussed the future of the estate tax. There will be much discussion, innuendo and rumor about the estate tax over the next few months. I will leave that to other prognosticators. Instead, this entry focuses not on what may happen, but on something clients can do to keep the current gift tax window open a little longer.

The gift tax exemption of $5,120,000 per person is scheduled to drop to $1,000,000 on January 1, 2013. The Obama administration and the Democrats in Congress have both indicated that they want to peg the estate tax exemption at $3,500,000. Although there has been some informal chatter on the Hill that the exemption may get extended for one year, most commentators feel the window for making large lifetime gifts is probably over.

Even though time is running out, many families are apprehensive about making a large gift before the end of the year. Regardless of a family's net worth, the decision to part with millions of dollars can be a difficult one. However, did you know that wealthy families may be able to prop the window open for nine more months even as it starts to slam shut? Here is an example of how this may work:

A married individual makes a gift to a trust. The married individual’s children have the right to receive discretionary distributions of principal with the client’s spouse as the contingent beneficiary. The children have nine months from the time of the gift to accept or make a “qualified disclaimer” of the gift. During this period, no distributions are made from the trust. If undesirable factors arise that make the gift unattractive, the children may make a qualified disclaimer as to their interest in the trust. Obviously, the children are under no obligation to disclaim the gift. However, if disclaimed, it has the effect of causing the gift to pass to the spouse because he or she is the contingent beneficiary. The couple’s children will not be treated as having made a gift. If the children disclaim the gift, the donor spouse can then make a qualified terminable interest property (QTIP) election for the trust, qualifying the gift for the marital deduction so that no gift tax is due. The couple is in the same position they were in prior to the transaction.

Alternatively, if the family is comfortable making the gift, the children do not disclaim, the donor spouse files the gift tax return and the funds are leveraged with life insurance. In essence, the family has been given a nine month free look at whether or not making the gift and leveraging it with life insurance makes sense or not.

The window may be closing, but clients can use the rules to their advantage to keep it open a little longer.

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