Wealthy Donor's Bitcoin Dilemma

You've already used up your $5-million plus estate and gift tax exemption. Now you want to pass  along another asset, worth $2 million, to your heirs.

Should you make the transfer immediately and pay federal gift tax? Or wait until next year, when you'll pay no tax because the new tax legislation will double the exemption?

A no-brainer? Not necessarily, suggests Paul Sullivan in his Wealth Matters column. If that $2 million is in Bitcoin, who knows its value in 2018? $20 million? $50 million? You might be smarter to pay tax on $2 million this year.

Or, you might wait for the Bitcoin bubble to burst. No $50 million, no $2 million, no tax problem.

A Meltdown for Family Limited Partnerships?

The family limited partnership, Wealth Management declared back in 2000, is the ice cream sundae of estate planning strategies.

By using a partnership to pass portions of a family business, real property or even a portfolio of marketable securities to family members, wealthy donors can generate substantial valuation discounts for gift or estate tax purposes.

Could the ice cream social be nearing an end? That's the threat posed by newly proposed regulations. Some observers think the regs will be finalized before we have a new president in the White House.

Last weekend Paul Sullivan in The New York Times and Laura Saunders in The Wall Street Journal offered briefings on the potential meltdown. Both columns may prove helpful to wealth managers as they urge wealthy clients to enjoy their sundaes before the feds turn up the heat.

Slicing Up Art to Save Estate or Gift Tax

If a painting is worth, say, $4 million, what is a one-quarter interest in the painting worth?

$1 million? Not necessarily, at least not for transfer tax purposes. The Elkins case could prove a game changer, reports Paul Sullivan.

Taking advantage of deep valuation discounts for fractional interests isn't always easy. If you give each of your three children a quarter interest in your Van Gogh, each will be expected to take possession of the painting for one quarter of the year. An alternative method – spotlighted by Christies – might be to gift the art and rent back.

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Big wins by taxpayers in estate or gift tax cases have a potential down side. Pressure mounts to "close the loopholes." Senator Sander's bill calling for a 65% estate tax also takes aim at minority discounts.

Could GRATs Lose Their Tax Magic?

Estimated wealth Sheldon Edelson has given his heirs using more than 30 GRATs

Estimated federal gift tax Edelson has saved by using GRATs

Grantor Retained Annuity Trusts have certainly drawn Bloomberg's attention. (Check out the video.) And GRATs again receive attention in the President's budget proposal, as Deborah Jacobs reports. Unlike the pro forma call for a return to harsher estate taxation, the proposed crackdown on GRATs, Crummey trusts and dynasty trusts shouldn't be dismissed, Jacobs believes.

Don’t expect thoughtful estate tax reform — we’re talking congressional horsetrading, perhaps done incrementally. (Heads up: watch those transportation funding bills.)

Richard Covey, the father of high-speed GRATs, estimates his brainchild has saved donors more than $100 billion in taxes since 2000. Could the end be nigh?

Quick Tax Quiz

Q. What do Americans do for 1,718,345.hours a year?

A. Fill out federal gift tax returns.

Why Santa’s in the Clink

H/T to Randy Cassingham for spotting this.

Pre-IPO Estate Planning

After scanning Twitter's IPO documents, WSJ tax reporter Laura Saunders concludes that Jack Dorsey,Twitter's chairman, Evan Williams, largest shareholder, and CEO Richard Costolo did some serious gifting in trust while Twitter's share value was low. The eventual estate-tax savings, the WSJ guesstimates, could exceed $100 million.

Dorsey and Williams set up GRATS.  "In essence," Saunders explains, "GRATs are used to transfer asset appreciation from one taxpayer to another, virtually tax-free. The owner of the assets—in this case, pre-IPO Twitter shares—contributes them to the GRAT before the asset surges in value."

While the trust exists, the owner receives annual payments adding up to the value of the original contribution plus a return based on an interest rate set by the Internal Revenue Service. In the past few years, the rate has been low, around 2%. 

At the end of the trust's term—which the owner must outlive for the GRAT to work—the owner has an amount equal to the value of what he put into the trust, but most of the asset's growth is out of his possession.

Williams and Costolo apparently used family trusts to take advantage of 2012's $5 million gift-tax exemption. The exemption was widely, but wrongly, expected to decline in 2013.

Moral: the best time to do tax planning for great wealth is before it becomes still greater.

Next Year's Gift Tax Exclusion, $14,000

This year a gift of as much as $13,000 is  excluded from federal gift tax. Next year, thanks to an inflation adjustment, the annual exclusion rises to $14,000.

Larger gifts require the donor to file a federal gift tax return. Always happens, right?

Not exactly. Uncle Patrick just gave his favorite niece a $18,000 Elantra to drive off to college. Do you expect him to file a return and reduce his Unified Tax Credit by $5,000? (Oct. 3 Correction: Patrick would reduce what amounts to his transfer-tax exemption by $5,000. The UTC itself would shrink by a smaller amount.)

What about that $15,000 watch Aunt Mame just bought for  her favorite nephew? Expect her to knock $2,000 off her lifetime exemption from gift tax?

Donors careless enough to die soon after gift-making may get snared in a tax audit. Otherwise, the exclusion seems based mostly on the honor system. Cheating, mostly unintentional, would be even more widespread were not payments of another person's tuition or medical expenses deemed nongifts.

Out of curiosity, your blogger checked out the annual gift exclusion of eighty years ago. It was $5,000. That was a lot of money in 1932 – over $82,000 in current dollars.

Shouldn't Uncle Patrick be able to buy his niece a Porsche without gift tax worries?

Jonathan Blattmachr's Mindboggling Trusts

Will more people with eight-or-nine-figure net worths (a somewhat limited market) set up trusts that take advantage of this year's extraordinarily generous federal gift tax and GST exemptions?

Jonathan Blattmachr, the noted tax-planning guru, is not letting the opportunity go to waste. According to Paul Sullivan in The New York Times, Blattmachr has created what could prove to be an estate-planning masterpiece.

[Blattmachr] has structured trusts with his wife, Betsy, that are so complex they boggle the mind. They enable the Blattmachrs to take advantage of the current exemptions and gift money today to reduce future estate taxes. But he has structured the trusts, which each hold about $4 million, in such a way that they have a built-in safety valve if something goes wrong: they can get the money back.

Could the IRS consider the trusts a shell game and deny the Blattmachrs' tax savings? Time may tell.

Mega-Roths and Young-Guy GRATs

Once you create a self-directed Roth IRA (probably by converting your old regular IRA) your goal should be to invest for as much growth as possible. In Forbes Deborah Jacobs tells how Silicon Valley entrepreneurs, using shares of their own companies, are parlaying this strategy into mammoth tax-free capital gains. She also notes an interesting trend for young tycoons to set up GRATs even before they've started a family.

Should the use of Roth IRAs to shelter unlimited wealth be curtailed, as Jacobs proposes?

Stock Market Volatility = Gift Tax Saving

Stock market gyrations may be causing you gastric distress, but volatility does have an estate planning upside. The Wall Street Journal points out that higher than normal volatility may justify a steeper than normal discount when gifting shares in a privately-held business.

(Clients will be able to transfer publicly traded shares pretty cheap, too, if the market keeps plunging.)

Prospecting for $5-Million Givers

As the Times reiterated yesterday, what makes the new revised federal gift tax so special is the perhaps temporary lifetime exemption of $5 million. Estate planners urge the wealthy to give big now.

Who's likely to heed that advice?

Good prospects probably share two characteristics:

They're relatively New Money. They can give away chunks of their rapidly expanding businesses (like this family-owned lumber company) without affecting their current income or standard of living.

They're Ultra High Net Worth. Even for someone with $30 million or more, putting aside $3-5 million for younger family members is a pretty big deal.

All told, new money and old, Wealth-X estimates the U.S. contains around 55,000 UHNWIs. Half of them have $30-50 million. Almost another third have $50-100 million.

But as Robert Frank pointed out on Wealth Report, the majority of those 55,000 live in just five states: California, New York, Texas, Florida and Illinois.

Secrets of Successful Estate Planning

I didn't know a codicil from a Corvette when I joined The Merrill Anderson Company. Summer courses at what became the National Trust School helped a bit, but my practical knowledge of estate planning was imparted by Earl MacNeill.

Mac taught me that tax planning should never drive estate planning. The first planning step is to help the client decide what, specifically, he or she wants to do with the assets of the estate. The second step is to compare ways of achieving those wants. The third is to choose the most satisfactory ways, taxwise and otherwise. If tax savings conflict with client wants, goodbye tax savings.

Also, Mac frequently urged me to explain "irrevocable." The fancy word has a serious meaning: What's done cannot be undone. An irrevocable gift cannot be called back.

Mac's emphasis on that point must have had a history. Last year (see below) probably wasn't the first time estate lawyers led their wealthy clients to make tax-oriented gifts that the clients later regretted.

Can I Take Back My Taxable Gift?

Certain hectomillionaires regret have given not wisely but too well last year, reports Deborah L. Jacobs for Forbes:

Many wealthy people got pitches from their estate planning lawyers last year encouraging them to make taxable gifts. It seemed like a good idea at the time.

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If … you ignored what lawyers then dubbed a unique "opportunity," you avoided a quandary that’s consuming a lot of airtime this week at the Heckerling Institute on Estate Planning, the annual Super Bowl on the subject sponsored by University of Miami School of Law. The lawyers meeting here in Orlando are in the awkward position of trying to figure out what clients who followed their advice can now do to reverse those 2010 taxable gifts.

’Tis the Season to be Gifting

The maximum gift tax rate, 35 percent, is the lowest in a generation. In December the "hurdle rate" for GRATs shrinks to 1.8 percent, the lowest ever. Add the threat of a punitive estate tax next year, and it's no wonder the wealthy may ring out 2010 with tax-minded gifts.

New Zealand Abolishes Last Wealth Transfer Tax

New Zealand scrapped its estate tax in 1992. Now the vestigial gift tax is going as well.

If New Zealand can live without death tax and the like, could Washington's new dose of GOP energy drink lead to similar results?

New Zealand's Parliament buildings, via Wikimedia Commons

Wealth Transfer Opportunities

The times are propitious for loans and gifts to younger generations, writes Jason Zweig in Wealth Transfer Via Bank of Mom & Dad. The column includes plugs for GRATs and IDGTs (Intentionally Defective Grantor Trusts).

"IDGTs (sometimes pronounced 'idjits') are often smarter than GRATs," writes Zweig, "because IDGTs move an asset out of your estate immediately."

The Most-Hated Tax?

You know how most people (Messrs. Gates and Buffett excepted) feel about the death tax. Imagine how they feel about the other transfer tax – the one Uncle Sam expects you to pay while you are still above ground.

The subject of federal gift tax came up at Tony Marshall's trial yesterday. Brooke Astor, his mother, had signed a letter in August 2003 authorizing him to receive a $5 million gift from her. In the letter she also agreed to pay gift tax on the $5 million.

As The New York Times reports, the $5 million gift looked a lot smaller by the time it was reported on Mrs. Astor's gift tax return for 2003.