Diserio Martin O'Connor & Castiglioni LLP

Last Minute Gift Ideas

November 8, 2012

Last Minute Gift Ideas


With the holiday season right around the corner you are likely making your lists and checking them twice... but here is some valuable advice: Don't go shopping for your family; it's crucial that this year's gifts be transfers of wealth.

For the next two months, you can benefit from all time high transfer tax exemptions and low transfer tax rates. The federal estate and gift tax exemption and the generation skipping transfer tax (GST) exemption are both currently $5,120,000 with a flat transfer tax rate at a historic low of 35%. At the end of the calendar year, if Congress does not act to change the law, these exemptions will decrease to $1,000,000 with a top transfer tax rate of 55%. (Note: If you are a New York resident, your gifts are not subject to State Gift Tax; however, Connecticut gifts are subject to Connecticut's Gift Tax which has an exemption of $2,000,000 and a top gift tax rate of 12%.)

Outright Gifts/Wealth Transfers

Now is the time to act on making gifts if you have not already fully exhausted your $5,120,000 exemption. Gifts, outright or in trust, may be made using a variety of assets: cash, securities, real estate, business interests and life insurance.

Children: A Gift of up to $5,120,000 per parent to your children ($10,240,000 in the aggregate) if accom­plished before December 31, 2012 incurs no federal gift and no Generation Skipping Transfer (GST) Tax. After New Year's, there would potentially be $2,111,000 due in taxes on this same gift.

Grandchildren: A Gift of up to $5,120,000 (per grandparent) to your grandchildren before December 31, 2012, incurs no federal gift tax and no Generation

Skipping Transfer Tax. If you wait until next year, the same gift could cost nearly $3,000,000 in transfer taxes in addi­tion to the gift of $5,120,000.

Qualified Personal Residence Trusts (QRPTs)

If you're concerned about liquidity, a QPRT may be the way to go. No cash changes hands and you can continue to enjoy the gifted property now while your heirs can benefit later. A QPRT is an irrevocable trust in which you place a vacation home or any personal residence. If you have two residences, you may even create two QPRTs. Done cor­rectly, a transfer to a QPRT may be accomplished with zero gift tax. This will depend on your age, the value of the resi­dence and the term of the trust. A QPRT takes the property out of your taxable estate at a discounted value. And best of all, you do not have to part with full use and enjoyment of the property during the term of the QPRT.

The tax benefit of a QPRT is derived from discounting the value of the gift by the delay in the beneficiary's receipt of the property (i.e., the grantor's right to live in the property during the term plus any provisions the grantor may place on the property). For gift tax purposes, therefore, the gift made through the QPRT is only the present value of the remainder beneficiaries' interest in the trust, not the full value of the residence. In order for a QPRT to successfully remove an asset from the donor's estate, the donor must survive the term of the QPRT. If the donor does not survive the term, the property is brought back into the donor's taxable estate. Careful consideration needs to be given to determining the term of the trust in order to get the maximum benefit from the QPRT.

During the term of the QPRT, the donor continues to use the residence and may deduct the payment of real prop­erty taxes and mortgage interest for federal income tax purposes. In addition, the donor continues to enjoy asset protection benefits, including "homestead" benefits for a Florida residence. However, it is crucially important to follow the formalities at the end of the trust term in order to preserve your tax position. At the end of the trust term, the property must be transferred to the remainder beneficiaries by a Deed that is recorded on the land records. Donors who maintain residence in the property following the term of the trust must pay rent under a written lease with a monthly market value rent (which should be determined by a local Real Estate Appraiser's analysis of the fair market value).

How to proceed?

If you are contemplating a gift or estate planning strategy as discussed, you should carefully consider what may be fleeting transfer tax savings by completing the transaction within the next two months. Further, plans and proposals have been set forth by Congress which may restrict your estate planning vehicles in the next calendar year, such as a reduction in the transfer tax exemption; an increase in the transfer tax rate and strict restrictions on Grantor Retained Annuity Trusts (GRATs). You should consult with an estate planning professional to learn more about how to take advantage of the current estate and gift tax exemptions.

The extraordinarily high exemptions in federal estate, gift and GST are scheduled to expire on New Year's Day. If you take advantage of these exemptions now, even if the value of your estate is less than $5,120,000, it will be a very good holiday season.

Attorneys Anthony laconis & Barbara Koteen
Diserio Martin O'Connor & Castiglioni, LLP
Stamford - Greenwich - White Plains - Manhattan
203-358-0800 -- www.DMOC.com