Recently, Peter J. Reilly, the Private Wealth Services Managing Director for Grant Thornton, commented on Forbes about the dilemma moderately wealthy individuals face with the desire to take advantage of the $5 million Unified Gift Tax Credit in 2012, but also insure their financial security. Click here to read Peter’s April 22, 2012 commentary.

How then to determine how much can be gifted, and still give the client financial security?  The reality is that the client does not need access to all of their discretionary equity so long as they can retain the required financial support from the gift they need without either risking inclusion in their estate, or inclusion by their creditors as a fraudulent gift.

Here is how I handle things for my $5-10 million clients:

  1. I draw up a “personal balance sheet” that shows their assets, and their current and projected liabilities.  The difference is the client’s “Discretionary Equity”.
  2. Based on the client’s individual tax, financial and risk profile, we break the Discretionary Equity into:
    1. Short term (< 1 year),
    2. Intermediate (1-5 years),
    3. Long term (5-10 years), and
    4. Secular (10+ years) investment tranches.
  3. Depending on the client’s age, place those investment assets that they are planning on secular investment planning into a gifting program.
  4. And I always use tangible assets (artwork, collections, legacy real estate) that are “legacy assets”, difficult to value in an estate, likely to have higher capital gains tax treatment and transaction costs, and from which the client is not getting any active income for gifting.

Here is a brief list of some of the techniques that can be used in 2012 that allow clients to give away principal without giving away income:

  • Grantor Retained Annuity Trust
  • Grantor Retained Income Trust
  • Private Annuity
  • Installment Sale
  • Sale of Remainder Interest
  • Split Purchase
  • Recapitalized Corporation
  • Recapitalized Partnership
  • Charitable Remainder Trust.
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