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
Every day my in box fills with information from many sources. Some is from mainstream media, trade journals, special reports and various reviews and findings from the legal and wealth advisory community. Often, while reading an article or report, many people come to mind that I think might also share an interest in the information.
Yes, the truth of the matter is, we are maturing into “Golden Boomers” and as “we” begin to approach and enter into retirement age our spending habits and where and how we spend – or not spend – our money will have an affect on the economy.
As we counsel clients during the preparation of their estate plans, one concern is usually very evident – parents are worried that their children will squander the funds and assets that they worked very hard to accumulate. This concern can be addressed in many ways, but usually, parents request specific provisions in their estate planning documents that control an heir’s access to distributions based upon age, accomplishments, and certain life choices. Therefore, the assets are distributed largely because a specific milestone has been reached. The thoughtful nature of the distribution planning, however, leaves a primary problem unaddressed – preparing the heirs for wealth transition from one generation to the next.
A family’s most important assets are the people- the parents, children, grandchildren, uncles, aunts, grandparents, cousins, etc.- the understanding and knowledge that these individuals have learned and will, ideally, integrate into the family. 
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.
We are pleased to announce that for the second consecutive year, Dan A. Penning was named a FIVE STAR wealth advisor for 2011 by HOUR Detroit Magazine. The magazine contracted an independent market research company to administer a research process to identify a select group of wealth managers who were exceptional in both their ability and commitment to overall client satisfaction.
More than 102,500 high net worth individuals and 4,200 financial services professionals were asked to evaluate wealth managers including financial planners, investment advisors, estate attorneys and accountants in the Detroit community. The final list was reviewed by a blue ribbon panel of financial services industry professionals. Less than 7% of the wealth managers in the Detroit area, including attorneys, accountants, and financial advisors, were selected.
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.
After great speculation and debate, Congress has now passed and President Obama has signed a tax package which gives individuals and businesses some predictability for the next two years through December 31, 2012. The Act extends the Bush-era tax cuts, provides estate tax relief, an “AMT” patch, a reduction in employee paid payroll taxes and provides businesses with new incentives to make capital investments by extending depreciation and tax credits.
Your planning needs remain our top priority. In furtherance of our commitment to maintain our expertise on estate, tax, business and succession planning, Dan Penning will attend the University of Miami’s 45th Annual Heckerling Institute on Estate Planning the week of January 10, 2011 to hear presentations by nationally-regarded experts on the planning implications of the new tax act for 2011 and beyond. In addition, the conference will host presentations with updated information and strategies focusing on planning for lifetime transfers of individual wealth/assets and business interests.
Virtually any newscast or newspaper continues to talk about the “tax increases” that will become effective January 1, 2011. While the general concept is widely reported there seems to be little attention being given to the specific taxes that will increase if no action is taken by the lame duck congress by the end of the year. The following information is not being offered as any political objection or endorsement but rather just factual information that I wanted to share with everyone for the express purpose of understanding the increases and encouraging everyone to consult with their tax consultants and legal counsel to determine whether any planning before the end of the year makes sense for you.
When Americans prepare to file their tax returns in January of 2011, they’ll learn the AMT won’t be held harmless, and many tax relief provisions will have expired.
Recently, many of my estate planning clients have asked questions about Lady Bird Deeds and when it is appropriate to use these instruments in estate planning. Like any planning tool, a Lady Bird Deed can be helpful in some situations, but is not appropriate in all cases. The use of a Lady Bird Deed in the wrong situation can lead to unintended or negative results.
The most common type of deed that people are familiar with is where there is an outright transfer of ownership from one party to the other, such as in the sale of a residence. This most common type of transaction utilizes a “fee simple” deed which is used to convey property from one (or more) owner to another. When Person “A” conveys real property to Person “B” by a “fee simple” deed, Person “B” becomes the owner of the property immediately upon the execution of and delivery of the deed.
In addition, certain transfers invalidate the ability of an individual to claim a homestead exemption in the state of Michigan with respect to their residential property taxes.
As we have mentioned in previous emails and other communications from our office, it is important that children, once they reach the age of majority (18 in Michigan), execute a Financial Durable Power of Attorney form and Medical Power of Attorney. A Medical Power of Attorney allows the individual nominated in the document the right to have access to medical records and be involved in medical decision making. A Financial Power of Attorney allows the agent designated to handle financial matters on behalf of the young adult. For students going to school out-of-state, the question arises whether to have legal documents created in the student’s home state, the state in which they attend school, or both. While the laws in most states are comparable so that a Power of Attorney created in one state usually will be respected in another, that is not always true.
