Article on Potential Danger of Maximizing Taxable Gifts in 2012

November 29, 2012

Jerome M. Hesch (Of Counsel, Carlton Fields) recently published his article entitled The Financial Danger of Maximizing Taxable Gifts in 2012. The article points out that maximizing taxable gifts before year’s end can cause financial hardships if the gifts are made to grantor trusts. The introductory paragraphs to the article are below;

At present, clients and their estate planning advisors are contemplating making $5,120,000 taxable gifts (or twice that amount using the split gift election) before year-end because the gift tax exemption may revert to $1,000,000 (FN2) starting in 2013. Before making the maximum taxable gifts for the remainder of the 2012 year, clients need to be made aware of the possibility that maximizing their taxable gifts can cause a financial hardship if the gifts are made to grantor trusts. Before making such gifts, clients and their advisors need to take into account the financial impact caused by the grantor having to pay the income taxes on the grantor trust’s taxable income and take precautionary steps if those projections show that the income tax treatment will not leave the grantor with sufficient assets for support in their later years.

This article is designed to show that for individuals with a life expectancy of over 20 years, making the maximum taxable gifts may not be the optimal strategy. In evaluating whether to take advantage of the $5,120,000 gift tax exemption for the rest of the 2012 year, one needs to take into account the ages of the clients, their living expenses and the amount of their income-producing assets. The situation illustrated below shows that for a couple ages 62 and 59 with $46,000,000 of investment assets, they should not make the maximum $10,240,000 in taxable gifts to a grantor trust.

Please click here to see the illustration referenced above.

Posted in:

Articles, Estate Planning - Generally and Estate Tax