Simplest Estate Reduction Strategy Is Generosity
If the older couple had not pursued the gifting strategy and the $5 million portfolio would have generated an incremental $600,000 over those 15 years. So in this example the total amount of wealth transferred would be $2.9 million. The couple's investment portfolio after 15 years with the gifting strategy would be $4.9 million vs. almost $7.8 million without a gifting strategy. That represents a 38% reduction!
Why should a couple with a $7.8 million estate worry if the current federal exemption is $5.12 million a person?
The current federal estate exemption is slated to fall back to $1 million in 2013! Another consideration is the state estate tax. Many states have a much lower estate tax exemption amount than the federal exemption amount. For example NJ's exemption is only $675,000.
What are the potential issues with an annual gifting strategy?
One possible drawback is the person you are making a gift to is incapable of managing their financial affairs. In this case you may want to use a trust to protect them from themselves or creditors. Also, this strategy does not make sense for anyone with a special needs child. Gifting them money outright may jeopardize their governmental benefits. In this case the correct way to give to them would be via a special needs trust. Finally, if the older couple had a shorter than expected life expectancy that would diminish the amount given. However, the couple's untimely death would be somewhat offset by less growth in their investments.
The annual gift is a humble but effective solution to wealth transfer. For those of you with larger estates it can still be an effective tool in your estate planning toolbox.
--By Michael Maye
Maye is the founder and president of MJM Financial Advisors (www.mjmfinadv.com), a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's "Biz Brain" and "Get With the Plan" articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.