2012 Mega-Gift ? Tough Decision For The Moderately Wealthy

If your net worth is much over $1,000,000 and you are paying attention to what is happening with estate and gift tax, you have a very difficult decision to make.  This year the exemption equivalent for gift and estate taxes is $5,120,000.  What it will be in 2013 is a mystery.  I know one fellow who has quite a few clients making 5 million dollar gifts.  If you use a family limited partnership structure and don’t screw it up (which is saying a lot), you could reasonably use a $5,000,000 gift to transfer $7.000,000 in assets.  He considers the move a no-brainer.  It is, of course, for people whose net worth is over say $20,000,000 (the number is debatable).

What I have been struggling to discover is a really good idea for someone whose net worth is more modest yet  still substantial.  I asked Howard Medwed of Burns and Levinson(Incidentally Howard is married to noted novelist Mameve Medwed) what someone whose net worth is 4 million should do.  Howard did not miss a beat (He seldom does.) “He should keep his money. He might need it.”  I’m inclined to agree, but I am not sure it is the right answer for everybody in that situation.  Moving up the ladder a bit – What about somebody whose net worth is 8 million ?

At the moment, the worst case for estate taxes next year appears to be a $1,000,000 exemption and a top marginal rate of 55% as opposed to a $5,120,000 exemption and a top marginal rate of 35% this year.  All that has to happen to get to the $1,000,000 / 55% scenario is gridlock.  There are intermediate proposals floating around but some of them include restrictions on the ability to take discounts.  So someone  with $8,000,000 in net worth using a family limited partnership might be able to use the $5,120,000 exemption to transfer $7,000,000 in assets.  Absent gridlock next year it might be that they can use a $3,500,000 exemption to transfer $3,500,000, since family limited partnership discounts are one of the techniques being targeted.

So far I have not been able to find a really good idea.  Just to get the discussion going, I am going to put out the less than good ideas I have come up with.  Sometimes a mediocre idea, well executed, is better than a great idea, poorly executed or never implemented, so do not scorn these ideas, but I would love to find a better one.

In order for a gift to stand up to IRS scrutiny and not be pulled back into your estate, you have to not have the ability or even an implicit understanding that you can get it back.  Nonetheless, if you leave yourself enough to get by for say 10 years, that should not be a problem.  After 10 years, you can count on your wealthy children to take care of you.  Just remember this plan did not work out so well for King Lear.

There is an area in Boston sandwiched between the financial district, what passes for a theatre district and Chinatown that used to be known as the Combat Zone.  It has not suffered the Disneyfication experienced by 42nd Street, but it is pretty well gone.  Regardless, there is a story about the Combat Zone in its heyday.  Two elderly ladies, dressed in a very respectable manner were arrested for soliciting.  Back at the station house the police decided this was more a matter for a mental-health professional and a social worker.  The former determined the ladies to be of sound mind and the latter that they were of moderately substantial wealth.  When  asked what motivated them to engage in prostitution, they replied that it was either that or invading principal.

If you do a mega gift that secures most of your estate from tax, it is really OK to bounce your last check and not leave anything behind.  The problem, of course, is running out of money too soon.  One thing to consider is an immediate annuity, which effectively will give you longevity insurance.  Given how low interest rates are, though, I cannot develop a lot of enthusiasm for the idea.

The HYCET Trust

Jeffrey Verdon promotes a trust that he calls HYCET for “Having Your Cake and Eating It Too”.  With HYCET, there is a completed gift even though the grantor is included as a permissible beneficiary at the sole discretion of the independent trustee.  A similar arrangement was blessed by the IRS in PLR 200944002.  Estate attorneys, I have run this by have not been all that enthusiastic about it, perhaps because they did not think of it.  I cannot give it a ringing endorsement, but it should be considered.

If you think the mega-gift idea has merit, you probably should not wait until after the election.  A Republican sweep is somewhat more likely than estate planners finally coming up with a way that you can take it with you, but I doubt that even a Republican sweep guarantees the $5,120,000 being extended. You really do not want to scramble to get a family limited partnership going and make a mega-gift within six weeks or so between the election and year end.

You could always just ignore the whole thing.  If we end up in gridlock and you die in 2013, your kids might resent the 2 million or so you could have saved them, but when you think about it, what has posterity ever done for us ?

You can follow me on twitter @peterreillycpa.