CKBlog: Estate Resources

Tuesday, March 07, 2017

Mom’s Million Dollar Gift

by Steve Haberstroh, Managing Director

I recently had lunch with a good friend of mine who is an Estate Planner at a top law firm in Fairfield County. Let’s call her Leah. Her practice deals with ultra-wealthy families so she is well-versed on sophisticated planning strategies when dealing with dynastic wealth.

After ordering food and making our usual pleasantries, we updated each other on the goings-on within our respective professions. I very much look forward to these lunches as she is full of clever ways to think about estate planning. When she said, “a gift during life is cheaper than the same gift at death,” I leaned in, asked for more details and then knew I had to share.

But before I do, I’d like to remind you that in no way does this constitute tax or estate planning advice as I am not qualified to do so.  I recommend each of our clients to consult with qualified CPAs and estate planners on these topics.  I am happy to introduce you to some talented folks who are qualified to give you this advice.  Ok, now that the disclaimer is out of the way, let’s get to work.

Both Leah and I typically deal with wealthy families who are wise to pay attention to federal gift and estate tax provisions. Why?

Let’s cover gift taxes first. Under current law, any individual can gift up to $14,000 per person per year without incurring a 40% gift tax. So, Mom can gift each of her five children $14,000 this year for a total of $90,000 and not pay a dime in gift taxes. Consider sending Mom an email, it’s been too long! smile

From what Leah told me, if Mom wants to give more than the $14,000 per person this year, it would eat into what is called her “Unified Tax Credit.” Under current law, an individual can gift up to $5.49 million during their life time or upon their death and avoid paying estate taxes (for purposes of this discussion, consider these federal estate taxes to be 40%). Let’s assume Mom is single and has $10 million so her assets total well above $5.49 million. She’s considering gifting you $1 million. Maybe you should text her instead of emailing ...

So why might it be more tax efficient for Mom to part ways with $1 million today as opposed to waiting until you inherit the $1 million? Let’s all say it together, “A gift during life is cheaper than the same gift at death!”

Lucky for you, Mom met with Leah last month and has already funded trusts up to the $5.49 million exemption (go Mom!) You just texted her to tell her how much you miss her and she fires back with a heart and $ emoji. She is now considering giving the $1 million gift today.

She calls Leah to find out whether it makes sense to gift now or wait until you eventually inherit the $1 million she has earmarked for you. After a quick call, she hangs up and the next thing you know, the bank calls telling you a very substantial wire transfer just hit your account. Happy hour anyone???

What Leah told Mom is that she really had two options. She could GIVE you the funds today or she can wait until you INHERIT the $1 million she has earmarked for you.  Remember, the gift tax is on the amount gifted, and since Leah has done this many times over (God bless her), she knows that if Mom wants to part ways with $1 million today, you can receive $715,000. It’s a simple equation really: $715,000 x 40% = $286,000. And $286,000 + $715,000 = $1,001,000.

If she waits until you inherit the $1 million she has earmarked for you (above the $5.49 million already in Trust), her estate will pay roughly $400,000 in estate tax (based on today’s Federal Estate taxes), netting you a pretty but not as cool $600,000.

Would you prefer to receive $715,000 today or inherit $600,000 at some point in the (hopefully far) future? Think about the future value of that $715,000 if you invest the funds wisely! (I can be reached at 203-682-7204 or .(JavaScript must be enabled to view this email address) via email).

Let the scenario I just laid out digest a minute and then remind yourself to always be kind to your Mom. And maybe you should call her instead of sending her a text ...

We run into situations like this from time to time. While we cannot practice estate planning law, we’ve seen enough scenarios to recognize when our clients should pick up the phone and call someone like Leah (after calling Mom of course).