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2012 Gift Suitability Analysis

2012 Gift Suitability Analysis

July 26, 2012 | © 2012 Nelson & Nelson, P.A.

By Barry A. Nelson

This information has been prepared in accordance with Circular 230.  Please review the following paragraph before reading this e-mail or it's attachments.

No one, without our express prior written permission, may use any part of this letter in promoting, marketing or recommending an arrangement relating to any federal tax issue.  Furthermore, it may not be shared with any other person without our prior written consent other than as required by law or by ethical rules. However, this prohibition on sharing this letter does not preclude you from sharing with others the nature of this transaction or the fact that you consummate it.


2012 provides a unique opportunity for making gifts using the federal estate, gift and generation skipping transfer (“GST”) tax exemption of $5,120,000 (reduced by any prior use of such exemption). Unless Congress takes action, the exemption decreases to $1 Million on January 1, 2013 and there is a possibility that those who miss the opportunity will have lost the ability to make significant tax free gifts. Based upon the existing estate and gift tax rate of 35%, the additional taxes from not taking advantage of the gift exemption of $5.12 Million that could expire on January 1, 2013 as compared to the $1 Million gift tax exemption that is scheduled to be effective on January 1, 2013 could be over $1.4 Million. If estate, gift and GST tax rates are increased to 45%, additional taxes from not taking advantage of the $5.12 million tax exemption could be over $1.8 Million. For couples who each retain their $5.12 Million of remaining gift tax exemption (total of $10.24 Million), the potential gift tax savings by making use of the 2012 exemption could be as much as $3.7 Million (assuming the gift tax exemption is reduced to $1 Million and gift tax rates increased to 45%). These computations disregard the tax benefits of removing future appreciation on assets gifted from future estate, gift and GST taxes.


If you believe you can afford to make gifts in 2012, you must carefully select assets to gift and understand the consequences if such gifts are determined to be undervalued in the event of an IRS audit. Whether to proceed with 2012 gifting depends in part on your risk tolerance after: (i) considering the possibility of valuation increases of the gifted assets should the IRS audit your gift tax return; and (ii) whether you are willing to incur the time or expense to defend a gift tax audit. Some may prefer to “reserve” some unused exemption to offset any potential IRS audit adjustment of the gift tax valuation. However, this approach has pitfalls. To the extent the full $5.12 Million of gifting exemption was not used and the federal exemption is reduced, the “reserve” may be wasted as, once the exemption is reduced, it cannot be used, even if there is no gift tax audit or adjustment of prior gifts. Although gifts can be made using one of a number of formulas, which have been recognized in recent court decisions and limit the value of assets gifted to avoid taxable gifts should the IRS challenge valuation of gifted assets, the IRS has yet to acquiesce to these court decisions. Accordingly, we need to understand your willingness to pay gift taxes or defend the valuation of assets you gift in 2012 in the event of a gift tax audit even if formula gifts are used.

* * *

The following list of questions is provided to facilitate our discussions and assist you to make the best year end 2012 gifting decision based upon your unique facts:

1) Previous Use of Federal Estate, Gift and GST Exemption:


Have you previously made full use of your federal estate, gift and GST tax exemption ($5.12 Million if single, $10.24 Million if married) by making prior taxable gifts?


It is critical that this question be answered accurately to avoid unanticipated gift tax. It is possible that you made a prior taxable gift by consenting to a split gift election with your spouse (or even a former spouse) and signing a prior gift tax return treating 50% of gifts made by your spouse (or prior spouse) as if they were made by you and not by your spouse. If recent gifts were made by you that were reported on a federal gift tax return, it may also be possible for the IRS to audit the return and increase values of assets gifted and reported on the return. Any such audit adjustment could result in reducing the amount of gift exemption available to you in 2012 to offset gift taxes.

If no, read on. If yes, you cannot make additional tax free gifts in 2012.

2) To save future estate, gift and GST taxes, would you be willing to make 2012 gifts of up to $5.12 Million (single), $10.24 Million (jointly with spouse) if such gifts can be made free of gift taxes if you and your spouse would have no access to such funds, regardless of any reversal in your financial position?

If no, read on. If yes, contact our office/your tax advisor.

3) To save future estate, gift and GST taxes, would you make 2012 gifts of up to $5.12 Million into a trust for your spouse (and possibly your children) where your spouse and children may receive distributions at the discretion of the trustee (you may not be a beneficiary or a trustee). Upon the death of your spouse, the trust assets will be held exclusively for your children (they will not pass back to you even if you survive your spouse).


If no, read on. If yes, contact our office/your tax advisor.

4) To save future estate, gift and GST taxes, would you make 2012 gifts of up to $5.12 Million into a trust for your spouse (and possibly your children) in 2012 where your spouse and children may receive distributions at the discretion of the trustee, (you are not a beneficiary or trustee). Upon your spouse’s death, your spouse can decide on whether all or any portion of the assets in the trust revert into a new trust created by your spouse for your benefit and in such event, an independent trustee will determine the extent of distributions to you?


If no, read on. If yes, contact our office/your tax advisor.


5) To save future estate, gift and GST taxes, would you make a 2012 gift into a trust designating your spouse and children as discretionary beneficiaries but providing that on a predetermined future date, the assets are distributed outright or in trust for your children if your net worth is at least a specified value determined upon creation of the trust that you believe would result in you having sufficient assets outside the trust to provide for you and your spouse for the rest of your life?


If no, read on. If yes, contact our office/your tax advisor.


6) Would your spouse be willing to initiate gift planning similar to the plans described in questions 2-5, above, but where you are the potential beneficiary so that if you and your spouse have not made use of your gifting exemptions, you could each gift $5.12 Million into trusts for one another before year end for a total of $10.24 Million providing that there are material differences in the trusts?

If no, read on. If yes, contact our office/your tax advisor.

7) To save future gift, estate and GST Taxes, would you make a 2012 gift into a trust in one of a number of states that have enacted self-settled asset protection trust legislation (such as but not limited to Alaska, Delaware, South Dakota and Nevada) where you, along with your spouse (and possibly your children) are potential beneficiaries understanding that the IRS could argue that your inclusion as a potential trust beneficiary could result in the IRS asserting that all trust assets should be included in your estate upon your death (especially if the trustee has exercised its power to make regular distributions to you during your lifetime)? If you prefer greater certainty then you should consider making gifts as described in questions 2-5.

If yes, contact our office/your tax advisor so we can discuss options.

* * *

If you answered yes to any of the above questions, it is critical that you contact our office or your tax advisor promptly. You will need to discuss the benefits and drawbacks of the gifting alternatives that you may be interested in, and documents must be drafted, executed and funded before year end. Many will want to make 2012 gifts and time constraints will likely limit the ability of most tax advisors to assist those who wait until late in the year to begin planning.

Barry A. Nelson

and the staff of Nelson & Nelson, P.A.

Judith S. Nelson | Jennifer E. Okcular | Michael A. Sneeringer
Richard B. Comiter, Of Counsel

* * * * 

Disclaimer: This information has been prepared for educational purposes only and is not offered, nor should be construed, as legal advice. Use of this information without careful analysis and review by your attorney, CPA, and/or financial advisor may cause serious adverse consequences. We provide absolutely no warranty or representation of any kind, whether express or implied, concerning the appropriateness or legal sufficiency of this information as to any individual’s tax and related planning.

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