Strategies to maximize the year-end exemption windfall

By Roccy Defrancesco

The Wealth Preservation Institute


Co-authored by Jim Duggan, JD

The several million dollar question is: What are the best methods or tools for gifting prior to year end?

By now, virtually every advisor knows of the gift windfall affluent clients can use prior to the end of 2012. This year, each client can gift assets up to $5,120,000 out of their estate without gift or estate taxes. This is a result of a weak/lame duck Congress who has unwittingly given us this unexpected benefit. On January 1, 2013, this number reverts back to $1,000,000 per individual and the maximum estate and gift tax rate will revert back to 55 percent (until year end, it’s 35 percent).

Use it or lose it?

Could Congress act to extend the higher gift/estate tax exemption? They could, but the chances of that happening are slim to none. What we know now is that it is available for use until year’s end. If affluent clients do not use the exemption, they stand to lose $4,120,000 of exemption, which will cost their heirs a savings of $2,266,000 at the 55 percent rate. And for married couples, these amounts double.

The several million dollar question is: What are the best methods or tools for gifting prior to year end?

Direct cash gift

The easiest thing a client can do is simply give money/assets to a loved one or heir. A married couple can gift $10.24 million in cash if they wanted (although giving directly to heirs without oversight or control is typically not a good idea).

Gift trusts

Most advisors will know these as irrevocable trusts. Clients give assets to the trust who owns them and are managed by a trustee for the benefit of the named beneficiaries. Trusts are preferred so the heirs don’t waste the money. With larger gifts, the gift trust is often structured as a perpetual, generation-skipping trust to provide for future descendants and to further minimize taxes. These trusts will typically have a “spendthrift” provision so creditors and spouses of the beneficiaries cannot touch the assets of the trust under any circumstance.

Family limited liability companies (FLLCs)

An FLLC is a true business entity structured as the family investment/holding/management company for the underlying assets. The FLLC becomes the owner of preferred family assets, and the desired family member(s) can be appointed as the controlling manager(s) of the FLLC. FLLC units are gifted instead of the actual assets. Typically non-controlling interest in the FLLC is transferred, but the underlying assets are not.
Also, FLLCs are typically set up with valuation discounts on the member units, thereby reducing the amount of the gift for tax purposes. Typical discounts are given for lack of marketability and lack of control, and the usually range from 25 percent and 35 percent. If you applied a 33 percent discount to $15 million of assets in the FLLC, the net value of the gifted interest would be $10 million. This approach can save the 55 percent tax due on $5 million if the client dies shortly after making the gift (the savings become much larger as the client continues to live and as the assets in the FLLC appreciate in value).

A combined approach

Lastly, to get the benefit of both applications, it is quite common to combine the two strategies. The client transfers assets to the FLLC in exchange for the membership interests, and rather than gifting the interests to the children outright, he or she would instead transfer the interests to a gift trust. This provides the best combination of asset protection, tax minimization and control in a perpetual planning structure. The combined structure can be depicted as follows:



Don’t delay

Whether your clients are gifting $1 million, $5.12 million or $10.24 million, the challenge is finding the gifting structure that is most optimal under the circumstances. The time to act is now!