GTH Estate Planning Blog

CPA Lars has ruminated in recent weeks on the reasons wealthy people aren't jumping on the opportunity to make large tax-saving gifts. Part of it, he thinks, is concern about having enough for the long haul.

Lars has a conversation with a banker friend that tweaks his view a little. He likes having his view tweaked. They're talking about the phenomenon and the benefit of working longer. It goes something like this: investment yields are low, and this makes dollars from working more significant. The banker puts it this way: if a person can make say $150,000 working, what's the equivalent of that in a bond portfolio? If bond yields are four percent, it would take about $4 million of them to produce the $150,000. So in a very limited sense working one more year is like having millions invested.

Lars realizes this is just one perspective; for instance at the end of the year the investor would still have the bonds and the worker wouldn't have them. But the idea causes him to calculate in another way. What does it buy to work another year? Is it a double benefit, a twofer?

As March yields to April, Lars is excited to check the first-quarter results of his investment bet with his wealthy Uncle. Nils, a winner in his real estate career but (Lars thinks) naïve in securities investing, has put all his entry in the bet ($500,000) in precious metals: half in gold and lesser percentages in silver, palladium, and platinum.

How has Nils done in the first quarter? Gold has done well, with an almost 7% increase. Although his other three choices are also precious metals, they don't correlate with the gold. Palladium is down just a little. The other two, silver and platinum, are up more than 16% each, rather spectacular for just three months. Nils doesn't know why his commodities don't correlate. Lars wonders whether it has something to do with industrial demand for some of them. On a weighted average basis, Nils's choices for the quarter are up 9.21%, not counting management fees or commissions (a subject for another day).

Lars has a couple of theories on his wealthy clients' reluctance to take advantage of the near-perfect storm for making large tax-saving gifts. One is the recent economic scare, the one that started in 2008. Even with things seeming to move toward normal again (but who knows?), most of us feel less secure than we did five or ten years ago. Even if our net worth might now have exceeded what it was then. A Lars client with say $4 or $5 million of net worth and thinking about retiring on it, must contemplate possibly losing a million or two off it in a wrenching market. Even good bonds, for crying out loud, took a big hit for a time there.

And yields are way down, particularly for the short-to-intermediate bonds that are more likely to avoid big losses of principal when interest rates rise. Retired people, even wealthy ones, have a great concern about income, an often exaggerated one Lars thinks. When an oldish guy quits working and starts relying on his investments for cash flow, he wants investment income (including the yield on his retirement plan holdings) to replace the income he was getting by working. Understandable, Lars muses, but a bit flawed.

Lars is telling his wealthiest clients it seems like a near-perfect storm of factors favoring large gifts in 2012:

The Federal exemption is high ($5 million), but this will be revisited by Congress in 2013.

Asset values are off what they were a few years ago.

Congress might also revisit current law permitting valuation adjustments for lack of control and lack of marketability of family-owned entities.

Interest rates are low for loans and sales of assets to future generations.

There is no State gift tax (in Washington). The State doesn't add large lifetime gifts in the estate tax calculation the way the Federal rules do.

Few of his clients, though, have taken much advantage of the situation. Lars tries to figure out why.