Making Gifts as the Grim Reaper Approaches

Paul R. Erickson (Professor of Accounting and holder of The R.E. and Marilyn Reamer Professorship in Accounting at Baylor University) and Don Cunningham (Professor of Finance and Real Estate at Baylor University) have recently released their article entitled Individuals with Short-Term Life Expectancies Face Difficult Gift Planning Choices, 30 Est., Gifts & Tr. J. 176 (2005).

Here is the authors’ description of their article:

In general, substantial transfer tax savings occur when individuals gift rather than bequeath property. These savings are complemented with modest income tax savings if the gifted property is income producing and the donor is in a higher tax bracket than the beneficiary. However, individuals with short-term life expectancies must consider two scenarios that could reverse these savings and result in tax losses: 1) death occurring within three years of gift and 2) death occurring in 2010 when estate taxes are eliminated under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). The potential for tax losses is compounded by possible legislative action to extend EGTRRA beyond 2010 and by timing differences that cause the present value of tax savings/losses to differ substantially from their nominal values.

This paper explores potential income tax savings and transfer tax savings/losses for gifting (as opposed to bequeathing) income producing property. We demonstrate the volatility of the savings/losses for taxpayers with short-term (1-7 years) life expectancies due to legislative action and the impact on the present value of these savings/losses due to timing differences and expected rates of return. Our calculations are based on income-producing property that does not appreciate in value (e.g. bonds). Conclusions are drawn from rates of return that vary from two to ten percent.