Estate and Elder Law

The Importance of Gift Planning as Part of an Estate Plan by Harvey Frutkin

Gift planning is an important factor in a family estate plan. In this Analysis, Harvey Frutkin discusses gift taxes and transfers in general, exclusions, exemptions, and deductions for family gifts, and the economics of family gifts. He writes:

[3] Economics of Family Gifts

     The significance of a gifting program in the family will depend on the family's financial circumstances, as well as their desired objectives. For instance, it might be the case that parents who are not particularly well off nevertheless wish to benefit their children by making annual or sporadic gifts of cash. Such gifts are unlikely to serve an estate planning purpose for the parents, but they satisfy other substantial motivations. In other cases, a lifetime gift will serve to remove property from the estates that would subject one or both of the estates to excessive tax.


     Suppose that Executive A owns corporate stock in Corporation X. Mr. A originally invested $50,000 in the stock, and it is presently worth $300,000. The stock is appreciating rapidly, and Mr. and Mrs. A decide to give the stock to the son presently, in order to avoid the needless inflation of their estates. In 2007, they split a gift of $24,000 worth of stock under the gift tax annual exclusion, and also split the gift of the remaining $276,000 worth of stock. The remaining applicable exclusion amount, available for future gifts by each of the parents, is $820,000 ($1.0 million less $138,000 each).

     As illustrated, a significant issue in planning for family gifts is whether, and to what extent, a gift can be leveraged for best tax advantage. In the above example, the amount effectively insulated from estate tax far exceeds the present cost, namely the absorption of a portion of the couple's unified credits. If, on the other hand, the property to be gifted out of the estate were not rapidly appreciating, the tax planning motivation would be far less important than for appreciating property. That is to say, if the value of the property were to remain constant, it may not matter whether the unified credit amount is used by the estate, after death, or by the donor during his or her lifetime.

[a] Valuation of Gifted Property

     As indicated above, if a gift is made in the form of property, the value thereof at the date of the gift is considered to be the amount of the gift. In those cases where a family's gift planning involves cash or marketable securities, the valuation of the gifts is not an issue. By contrast, in those frequent instances of gifting other forms of property, the valuation of the property to be gifted may be the central issue. There are statutory rules, regulations, and scores of court cases decided each year, in the context of the gift tax as well as the estate tax, on this very point. The question simply is, for tax purposes, how much value is being transferred from the donor to the donee?

(footnotes omitted)

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