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Gifting Away Assets During Your Lifetime

Michael L. Brunner

If you want to engage in lifetime gifting above the annual gift tax exclusion amounts ($11,000 per year per person in 2003) and the lifetime gift tax exclusion amount ($1 million), you should consider some creative options that may allow you to increase the size of your gifts while minimizing any gift tax.

If you wish to engage in lifetime gifting, be aware that a gift tax remains. The top gift rate will be incrementally reduced from 49 percent in 2003 to 45 percent by 2009. In 2010, the top gift tax rate will equal the top individual income tax rate (estimated to be 35 percent).

Any portion of the lifetime gift tax exclusion used will reduce your estate tax exclusion by that amount. Here are a few strategies to leverage lifetime gifts:

Grantor Retained Annuity Trust

A GRAT allows you to pass along assets you believe will appreciate in value to family members as discounted levels. You contribute assets to the trust and receive a fixed annuity payment stream for a specified period of years.

At the end of the trust term, the remaining assets and their appreciation are distributed to your beneficiaries. Since the initial value of the gift is reduced by the present value of the annuity payments, you could structure a payment schedule and amount that could result in a minimal gift tax value.

However, if you die before the end of the specified term, the trust property would be included in your estate and subject to estate taxes. Of course, if the estate tax were not reinstated, in 2011, this would not be a problem.

Life Insurance

You could use life insurance to help reduce your estate and gift tax liabilities. Life insurance is a leveraging option that often provides a substantial benefit for relatively small premium dollars.

It may be used by itself to increase the size of your estate, creating an "instant" estate.
Or, it may be used for liquidity and paying estate taxes cost-effectively (based on the inherent leveraging).

And, the proceeds of life insurance are typically income tax-free to the beneficiary. With careful planning, these proceeds may also be estate tax-free.

LLCs Or FLPs

A Limited Liability Company or a Family Limited Partnership could be a useful leveraging technique. An LLC or FLP may provide a tool for reducing the size of your estate for transfer-tax purposes and let you retain control and management of your assets.

The LLC or FLP is made up of managing or voting interests and nonvoting interests.
You, as a business owner, could retain the voting and managing interests (thereby keeping control and management of the assets) and gift the nonvoting interests to your children and grandchildren.

Since the nonvoting interest gifts to your children and grandchildren lack voting rights and are not readily marketable, they might be discounted for gift tax valuation purposes.

Dynasty Trust

The Dynasty Trust could allow you to maximize the use of your lifetime gift tax exclusion.

Here's how it works: Generally, you would fund the trust, with an amount up to yours and your spouse's lifetime gift. The trust assets, including any growth, will remain free from federal transfer taxes (i.e. estate, gift and generation skipping transfer taxes) for as long as they remain in the trust.

In certain states, such as South Dakota, which have eliminated the common law rule against perpetuities, the trust may theoretically last forever.

Income or principal from the trust may be distributed to your children, grandchildren and great grandchildren as specified in the trust document. The provisions could tie those distributions to incentives, such as maintaining gainful employment, and permit distributions for funding businesses or purchasing homes for the use of beneficiaries or other activities.

There may also be provisions in the trust document to gift a percentage of the assets directly to a charity or family foundation. Assets remaining in the trust are protected from creditors and divorce judgments.

Create Your Estate Plan

Discuss your estate planning objectives and concerns with your financial consultant and your tax and legal advisors. Together you can develop an estate plan that addresses your unique financial and family situations so that you can effectively transfer wealth to your beneficiaries.

Michael L. Brunner, CFP, is senior vice president-investments, portfolio manager and financial consultant for Salomon Smith Barney Inc. in Houston.