Problems Planners Might Face with the Gift Transfer

There are number of problems that planners and clients might face when attempting to transfer money to take advantage of the gift tax exemption. Here are few of the challenges:

• A client has to decide how much to gift under the exemption’s limitation of $5.12 million. A client might not want to gift more than he or she can. After all, a client might still need their assets to support themselves. In addition, this type of transfer might also be characterized as a fraudulent conveyance and could be set aside.
• Both the client and the attorney might want to take into consideration the reciprocal trust doctrine. It is likely that an attorney and client might want to place the gift within an irrevocable trust or a dynasty trust for the benefit of donor’s family members. In the case of married couples, a planner might set up two trusts to take advantage of the gift tax exemption for both spouses. Sometimes these trusts can be set up so that the other spouse is a beneficiary of the trust. If the planner accidentally creates two similar trusts, then the IRS could hold that each spouse is actually the grantor and beneficiary of his own trust. This would allow the IRS to tax the estate of each grantor, which would undermine the purpose of the gift tax exemption.
• Problems with the “step transaction” doctrine might also occur. This occurs when one spouse gives the other spouse the funds to finance his or her trust. Here, the IRS can hold that there was only one gift made to the trust. The result here could leave the estate with an unintended large tax.
• A client might want to “gift split,” or they might want to just transfer the total amount of $10.24 million to a trust and split the gift with their spouse. This would work and it would avoid the problems with the “step transaction” doctrine; however, it would mean that the spouse who did not make the transfer could not be a beneficiary of the trust. 
• For planners, there is always a chance that a client will not do business with the planner because he or she might want to take advantage of favorable trust law in other states.

See Martin Shenkman, Estate Tax Minefield, Financial Planning, June 1, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.