Gifting to Avoid Estate and Gift Taxes
Going, Going, Gone!
U.S. taxpayers are experiencing a “perfect storm” of opportunity to make tax-free transfers (gifts) of assets such as family businesses, real estate and other wealth from one generation to the next. The gift tax was first enacted in 1932 by the federal government. Over the coming months, we all have what may be the best opportunity since 1932 to gift family assets without a gift tax now and to avoid significant estate taxes later.
Two notable exceptions to the gift tax
Some people are not aware that giving away assets to their children or other individuals may create a taxable event. The “gift tax” referenced above applies to anything of value transferred by one individual to another. There are two notable exceptions to the gift tax. One is an “annual exclusion” which is an exception that allows individuals to gift up to $13,000.00 per year per person without any gift tax consequences. 
A second exception is an overall gift tax exemption which historically has been limited to $1M during an individual’s lifetime.
The above-referenced “perfect storm” of opportunity is almost certainly short-term in nature. Several key elements have transpired to create this opportunity as follows:
- At the conclusion of 2010, Congress changed the estate tax exemption which allows for transfers of gifts up to $5M per individual ($10M per married couple) of assets with no federal gift tax.
- Asset values, particularly for real estate, are still significantly depressed resulting in a greater opportunity to gift value from one generation to the other. In the State of Michigan, a recent Supreme Court decision also provides a unique opportunity for parents to gift ownership of real estate to their children in such a way that a transfer can avoid a significant increase in future real estate taxes.
- Certain widely accepted techniques used by experienced estate planning attorneys may also result in individuals transferring 10 to 20 times the $5M or $10M gift tax exemption limit without incurring gift taxes based on certain “leveraging techniques”. Although these techniques can be complex, they are well established and have withstood attacks in the past by the IRS.
- Most transfers that are made to take advantage of the gift tax exemption also provide significant asset protection for the assets.
- Many of our Cottage Law clients with family cottages will be able to enjoy long-term tax savings as a result of taking advantage of this opportunity to make tax-free transfers (gifts) of these legacy assets. Visit our Cottage-Law website at www.Cottage-Law.com for additional information.
An appropriate gifting strategy can save significant taxes
Why act now? Unless Congress and President Obama take further action to create a new law, the 2010 Tax Act will automatically expire at the end of 2012 (approximately 13 months from now). The current lifetime gift tax exclusion of $5M per person will drop to $1M. The window of opportunity for gifting significant assets from one generation to the next to avoid potential future estate tax is narrowing. Gifting assets removes the asset’s value in the transferors estate for estate tax purposes. As a result, an appropriate gifting strategy can save significant taxes.
Reducing future tax burdens
It is a widely accepted belief among financial advisors and other financial experts that taxpayers should transfer assets that are depressed in value that may be subject to future estate tax liability as soon as possible. 
As these assets begin to recover and grow in value in the future, so do an individual’s current and future tax burdens.
The possible benefits
Whether you perceive yourself as wealthy or not, given the possible benefits of making gifts of assets and the unique opportunity that currently exists to do so, everyone should at least evaluate their potential future estate tax liability and how current gifts of assets may reduce that liability.
Please contact me if you would like to evaluate your own situation to determine whether gifting assets at this time is right for you.
Dan A. Penning
My son Casey has been crossing out days on the calendar as the school year winds down into his summer up north. He’s been talking non-stop about everything he wants to do this summer, and spending time with those who are a part of his summer. Without fail, his list includes everything he wants to do each summer. I’ve also been thinking about these excursions and of how to keep our lunch dry during our annual trip down the Crystal River (see photo).
if you haven’t already, and looking at short- and long-term strategies and legal structures to avoid the uncapping of your property.
However, after certain transfers of ownership occur, property becomes uncapped and thus subject to reassessment based on actual property value. In the event of a “transfer of ownership” of property after new law took effect in 1995, the property’s taxable value for each calendar year following the year of the transfer is the property’s state equalized valuation for the calendar year following the transfer.
In order to avoid an uncapping of property taxes at the death of a joint owner, the first element that must be satisfied is that when the joint ownership was established, at least one of the joint owners was an “original owner”. An “original owner” to satisfy this provision of the joint tenancy exception would be a person who owned the property at the time that the last “uncapping occurrence” occurred. For example, if a husband and wife, or the survivor of them, purchased property in 1998 resulting in the uncapping of the property at the time of their purchase, then either of them would be an “original owner” and satisfy this element of the joint tenancy exception.
The next element that must be satisfied in order for the joint tenancy exception to apply is the form of joint ownership must be “joint ownership with rights of survivorship.” This type of joint ownership means that all of the joint owners have a current ownership interest in the property; however, at the time of one of their deaths, the deceased individual’s interest then, by operation of law, transfers to the remaining joint owner(s). A type of joint ownership that does not satisfy the test is joint owners as “tenants in common”. This type of joint ownership indicates that a joint owner and undivided fractional share of the property and in the event of a joint owner as a tenant in common’s death, the deceased individual’s share is then part of his or her estate and can transfer to their heirs.
While the Supreme Court’s decision presents a benefit to Michigan taxpayers who are real estate owners, everyone should keep in mind that the Legislature could amend the current law to remove the joint ownership exception which has been recognized by the Supreme Court in the Klooster case. Whether or not legislative action in the future would be retroactively applied to those joint ownership situations that existed prior to any legislative action taking place is unclear. If you are considering a transfer of real estate to possibly take advantage of the joint tenancy exemption, please contact us to discuss the specific facts of your situation and your goals to make sure your proposed action is best for you and your family.
Dan A. Penning has been invited as a featured speaker to present on the topic of estate and gift tax issues concerning cottage succession planning at the ICLE 51st Annual Probate & Estate Planning Conference for Michigan attorneys. Penning will join two other speakers addressing cottage law succession planning issues during the three-day conference featuring a variety of topics for Michigan attorneys seeking continuing legal education. The conference will be held at the Grand Traverse Resort, in Acme, Michigan on May 19-21, 2011 and a second presentation will be held at The Inn at St. John’s in Plymouth, Michigan on June 17-18, 2011.
For the time being, the Senate has again abandoned efforts to impose a “carried interest tax” on venture capitalists, investors, and managers of family businesses. The tax would have increased the 15% capital gains tax rate on certain investors’ profits to the top income tax rate, which is scheduled to hit 39.6% on January 1st (H.R. 4213). The share of investors’ profits is called “carried interest.” It might appear at first glance that it’s perfectly fine for investment managers to be taxed at higher rates on their “carried interest.” But venture capitalists and investors don’t reside exclusively on Wall Street. The law was written so broadly that it could have hit approximately 6.5 million people invested in real estate partnerships that own anything from a single dwelling to sizable commercial properties.
In reality, the proposed legislation could have imposed a higher tax rate on any partnerships invested in particular assets. The higher rates would apply to investment gains and also to gains from the sale of the partnership, and therefore, a sale of the family business would not qualify as a capital gains transaction. Family operations are commonly formed as partnerships and managed by a family member. Under the proposed legislation, the managing family member could be subject to the “carried interest tax.” For a family partnership to gain liability protection and also not be subject to the higher taxes, an outsider – not a family member — would have to manage the partnership. The House version of the legislation exempted family farms and ranches held in partnerships. Other family partnerships would have had to wait for the Treasury Department to exempt them through regulations.
Wealth managers, broadly defined, are those individuals who help you manage your financial world and/or implement aspects of your financial strategies. Common examples of wealth managers are financial advisers, life insurance agents, accountants, tax advisors, attorneys, etc. With more than 11,000 wealth managers in the Detroit area, how do you find someone who listens to you, represents your interests and operates with an emphasis on integrity and service? HOUR Detroit magazine can help. The magazine formed a partnership with Crescendo Business Services to find out which wealth managers scored highest in overall satisfaction.
The resulting list of 2010 FIVE STAR Wealth Managers is an elite group, representing less than 7 percent of the wealth managers in the Detroit area. Only 686 of the top-scoring wealth managers made this year’s list. . . . ”
Launching a boat in Michigan waters during the month of April is not very common. Boat insurance policies, however, generally begin to provide coverage on April 15. If you’ve not given much thought to your boat insurance policy, this spring might be a good time to review your policy and determine if you need more protection as you navigate the Great Lakes or Michigan’s inland lakes.
The valuation clause in the policy is what determines the calculation the insurance company uses to arrive at the amount to pay in the event of a loss. Actual cash value policies take into account depreciation, where other policies are written on the basis of “agreed value.” If the boat is a total loss, the policy holder of an “agreed value” policy receives the amount as provided in the policy, rather than the actual cash value. This coverage is not available from every insurance company.
Consider liability and bodily injury coverage that provides you with liability insurance coverage when there is damage to something owned by someone else or injury to someone else. Medical payments coverage pays for bills that may arise from an accident on a boat. Additional coverages may be available: uninsured boater’s insurance, roadside assistance (when towing your boat), trailer insurance, and coverage if you travel to Canada.
The RUA, Michigan Compiled Law 324.73301(1) states: “[A] cause of action shall not arise for injuries to a person who is on the land of another without paying the owner . . . for the purpose of fishing, hunting, trapping, camping, hiking, sightseeing, motorcycling, snowmobiling, or any other outdoor recreational use . . . unless the injuries were caused by gross negligence [i.e., intentional misconduct] or willful and wanton misconduct of the owner.” In 2004, the Michigan Supreme Court reversed itself and determined that the RUA will, in fact, operate pursuant to its plain language. Therefore, unless a property owner acts with the intent to harm another, the RUA can protect a property owner from liability for injuries sustained by a third party who is performing recreational activities on the land irrespective of whether the land is undeveloped, developed, vacant, occupied, urban, suburban, rural, subdivided or unsubdivided.
