Lifetime Giving
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Copyright 1992, 1998 - Thomas J. Keating, IV, All Rights Reserved
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Section Five - Miscellaneous Thoughts
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5.1 Gifts of Illiquid Assets.
A difficult gifting problem arises where the donor's assets are
largely illiquid and/or indivisible, and there is no convenient way
of breaking them up into "chunks" of value for purposes
of making gifts within the annual exclusion limit.
There is no simple solution to this problem, but, in an appropriate
case, consideration should be given to transferring such assets to
a business entity (e.g. corporation, partnership, limited
liability company), ownership interests in which could be then
given periodically to the various recipients.
There are generally significant costs and administrative burdens
associated with this technique, but, even so, it may enable an
effective gift program to be carried out which otherwise could not
be accomplished.
5.2 Gifts to Charity. No
discussion of lifetime giving would be complete without some
reference to charitable gifts. A particularly attractive feature
of lifetime gifts to charity is that the donor receives a current
income tax deduction (subject to certain limits) in addition to
complete exoneration from gift tax and a reduction, perhaps a
substantial one, in the amount of estate tax which will eventually
have to be paid.
If the donor has significant charitable inclinations, there is
greater tax advantage in making lifetime gifts to charity than
providing charitable bequests at the time of the donor's death,
because of the availability of the income tax deduction.
Charitable gifts can take a number of different forms, ranging
from the very simple to the very complex. Gifts (a) can simply
be outright, taking effect at the time of the transfer, (b)
can take the form of a "bargain sale", in which an
asset is sold to charity for less than its fair market value,
with the difference between the sale price and the market value
being the value of the gift, (c) can take the form of a gift
of a remainder interest in the donor's residence or farm
property, or (d) can take the form of a gift of a conservation
easement to a qualified recipient.
In addition to these forms of outright gift, the donor can
create so-called "split interest" transfers, which
are gifts in trust, under which there are benefits passing
both to charitable and to non-charitable beneficiaries.
In this type of transaction, the value of the income tax
deduction is based on the payment provisions of the trust,
certain interest rate assumptions, and, generally, the
anticipated life expectancy of the non-charitable beneficiary.
Three types of split interest device are (a) the charitable
remainder trust, (b) the charitable lead trust, and (c) the
pooled income fund. A particular virtue of split interest
giving is that the same dollars can provide support both for
the donor or other beneficiaries and for the charitable
recipient, and can also provide some striking income tax
advantages to the donor.
5.3 Gift Program Requirements.
What is required in order to carry out a successful gift program?
Actually, the ingredients are few in number and simple to express.
They are (a) a degree of confidence in oneself and in others,
(b) a sense of purpose and steadfastness in adhering to the
program, (c) a measure of generosity, (d) an abhorrence of waste,
and (e) sufficient time in which to carry it out. All of these
ingredients, except for the last one, are within your power
to achieve.
The last one, sufficient time, deserves some specific comment.
Experience teaches that most 60 or 65 year old persons, unless
they have serious health problems, find it difficult to develop
an appropriate sense of urgency about lifetime giving.
Each calendar year that expires without gifts having been made
significantly erodes your potential gift program. If it should
turn out that you have 70 years to live, every year that you
delay beyond your 60th year costs you one-tenth of your total
opportunity for tax-free transfers.
Starting early makes it more feasible for you to restrict your
gifts to a core group of donees (e.g. your children); if the
gift program is not begun until late it may be necessary to
include children's spouses, grandchildren, and perhaps
grandchildren's spouses, in order to achieve good tax results.
5.4 Prime Candidates. Who
should be viewed as prime candidates to embark on a serious
gift program. Reasonable people could differ, but here is
my list:
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1. Any person who
has a net worth of over one million dollars, or any
married couple having over two million dollars.
The greater the excess, the greater the potential benefit
and the greater the urgency to get started.
2. Any person who has
assets which are expected to grow dramatically in value.
3. Any person who
has adequate retirement income from employer pension or
profit-sharing plans or other relatively secure and
inexhaustible sources.
4. Any person who
has family members whom they trust and admire and toward
whom they feel some affection and/or sense of
responsibility.
5. In Maryland
especially, any person who wishes to make substantial
transfers to collateral relatives (nieces, nephews,
etc.) or to non-relatives, as timely gifts may avoid
a 10% state inheritance tax in addition to any federal
taxes.
6. Any person who
believes that his family or friends can make better use
of his accumulated wealth than the government can.
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5.5 Solutions are Available.
You may have inferred by now that I am generally in favor of
lifetime giving, for both tax and family reasons. You also
know by now that there are often certain impediments to carrying
out both a wise and productive program of lifetime giving.
What you must finally know, in order to have an entirely balanced
view of this subject, is that there are many tools and techniques,
ranging from the simple and obvious to the complex and arcane,
which can be used to overcome these impediments.
I have deliberately not mentioned anything specific about these
tools and techniques, as a simple overview would be misleading
and/or confusing and a suitably informative treatment would
multiply the length of this discussion.
Suffice it to say that just about the only conditions for which
your advisors cannot prescribe an effective cure are (a) the
potential donor's complete and unreasoning aversion to lifetime
giving, or (b) the potential donee's irredeemable unworthiness
to receive such gifts.
So unless one or both of these conditions exist, give your
advisors a full and candid look at your situation and ask them
to suggest suitable specific solutions for your consideration. I
cannot promise you that all of these solutions will be acceptable
to you; there are issues of economics, expense, complexity,
functional limitations, and/or tax compromise associated with
most of them.
What I can promise you is that, for most clients, most of the
time, they deserve a fair and unbiased examination.
5.6 Conclusion. While all
forms of lifetime giving have a certain utility, it is the
"annual exclusion" gift to children and grandchildren
which, for most clients, is the most effective single tax
reduction device available.
Such gifts completely avoid (a) federal gift and estate tax,
(b) federal and state generation skipping transfer tax, (c)
Maryland inheritance tax (unless the gifts are substantial in
relation to the size of the donor's estate and are made within
two years prior to the donor's death) and (d) Maryland estate
tax.
The only significant tax disadvantage, as we discussed, is the
loss of "step up" in basis. Taxpayers who fail to
utilize this exclusion in a thoughtful and systematic manner
are depriving themselves and their heirs of a truly
extraordinary opportunity for tax avoidance.
Transfer taxes are largely voluntary taxes for most people, even
the very affluent, if they have the will to act. Of course,
there are always those few who have so much wealth that it is
very difficult and complex for them to defeat the system, but
it is generally possible for most well-to-do people to pay only
a small fraction of the amount that, alas, their families
actually will someday pay.
In this instance, as is usually the case, you cannot get the
right answer unless you have asked the right question. The
right question is not "Will my children / grandchildren /
favorite charity make as careful, sensible and productive use
of my capital next year, or ten or twenty years from now, as
I would do myself?". The reason it is not the right
question is that, in the long run, you won't be here to do
it yourself.
The right question, instead, is "Will my children, etc.,
make as good use of my capital as the government would do?".
That is the real choice facing you; your capital will either
be in the hands of persons chosen by you or in the hands
of persons chosen by the government. Your call.
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