On Dec 1, 2008, the NationalBureau of Economic Researchmade it official and announcedwhat many of us already suspected– the U.S. economy is ina recession. Stock values havetumbled, property values haveplummeted and the country isfaced with economic uncertainty.
This is certainly dire news formost Americans, but for some,particularly those likely tobecome ensnared in the estatetax, this troubled economy mayoffer them an opportune timeto transfer wealth to their children,grandchildren or others.
By utilizing annual gift taxexclusions and lifetime exemptions,high net worth individualscan take advantage of thesemarket conditions by removingdepressed assets from theirestates and transferring themto younger generations in thehopes that the younger generationswill be able to “cash in”when the market rebounds.Any appreciation of theseassets will become part of theyounger generations’ estatesand not the donor’s.
The annual gift taxexclusion in 2009 is $13,000.This means that each individualcan make an annual exclusion giftto any number of individuals upto $13,000 per donee with no taxconsequences. Any gift abovethis amount will be subject to thefederal gift tax.
In addition to this, over anindividual’s lifetime, he or shecan give away an additional$1.0 million, tax–free, by usinga portion of his or her lifetimeexemption and by filing a gifttax return to indicate this use.However, use of this $1.0 millionwill reduce the amount of federaltax exemption available to anindividual at his or her death.The federal estate tax exemptionin 2009 is $3.5 million.
What does all of this mean?Well, let’s consider an example.Let’s suppose that Mom has a networth of $10 million. Knowingthat she has a taxable estate (inother words, the value of Mom’sestate at her death will exceedthe $3.5 million federal estate taxexemption in 2009), Mom wantsto consider ways she can reduceher taxable estate, which will betaxable at a top rate of 45 percent.There are a number of optionswhich may be available to her.
First, Mom has a stockportfolio – the value of which hasbeen significantly reduced due tothe recent financial crisis. Momcan remove a portion of thesestocks from her taxable estateby gifting to each of her threechildren $13,000 worth of stockby way of her annual exclusion.When the market recovers herchildren will realize the full valueof these stocks. For example,assume after the gift is completedthe stock market rebounds andthe $13,000 given to each childis now worth $26,000. Momhas effectively transferred acombined total of $78,000 worthof stock to her children tax–free.
Additionally, Mom may alsoconsider giving away $1.0 millionworth of stock to her childrenin three equal shares by usingher lifetime exemption. Toaccomplish this, Mom will needto file a gift tax return reflectingthe current value of the gifts.Although Mom will have madea taxable gift to each of herchildren (insofar as the amountof the gift to each child is overthe $13,000 annual exclusionamount) and assuming Momhas not made any taxable gifts inprevious years, she will be ableto utilize all of her $1.0 millionlifetime exemption to offset anytaxes due from the gifts. Similarto the first example, once themarket recovers and stocksreturn to their pre–crisis values,Mom will have potentiallytransferred a significantly largeramount to her children than theoriginal $1.0 million.
In the above examples, Momhas removed certain assets fromher estate at a reduced value,effectively reducing the size ofher estate subject to estate taxesat her death.
These uncertain economictimes have presented a significantchallenge for all of us and formany, the urge to hang on totheir wealth seems like the logicalapproach. However, for high networth individuals depreciatingasset values present a uniqueopportunity to make currentgifts and save significant gift andestate taxes.
Due to the evolving nature,complexity and intricacies offederal gift and estate taxation,it is absolutely imperative toconsult with your legal andfinancial professionals whendetermining which estateplanning strategies are best suitedfor your particular needs andobjectives.
