A flurry of year-end gifts (cont'd).

December 13, 2012, by

TE BLOG. warehouse boxes. 12.2012.iStock_000016499990XSmall[1].jpg
Duncan arrives on time for today's meeting with his and Lars's mutual client Jack. Retired rich guy Jack, as is his custom, came in way early and has been distractedly paging through magazines and watching the door for Duncan. Lars was informed of Jack's early arrival but knows better than to go out and try meaningless conversation when Jack really just wants to have the meeting.

They wander into the conference room; Lars's office is large enough but too messy. They all know the purpose is to determine year-end tax-saving gifts for Jack and his wife Andrea, who have already turned their business over to two of their kids (no easy task), but still own a lot of real estate including the business facility, and a large portfolio of cash, stocks, and bonds.

Jack: "Phil told me I could do a trust for Andrea, and she can do a trust for me, and we can keep the income that way." Duncan recognizes this description and tells Jack yes, there is such a thing called a spousal bypass trust. Just as wealthy people often do through their Wills or Living Trusts, one spouse can establish a trust that benefits the other but is outside the taxable estate. One challenge with doing this during lifetime, is that it must be done with separate property. Jack and Andrea started their marriage with nothing, have inherited nothing and been given nothing, so everything is community property. Duncan says they can create separate property by agreement. But to do so now and suddenly put it in a trust (all before year-end) would likely be challenged by the IRS as indistinct steps. If it were later found, then, that the trust was funded with community rather than separate property, the whole gift would fail to escape their estate. Do Jack and Andrea need so badly to keep the income?

This gives Lars an opening for his life-of-your-liquidity trick. Jack and Andrea are about 75. They have $10 million of liquid assets, and spend close to $200,000 a year. Lars: "If all your real estate disappeared, and you never got any interest or dividends or growth on your stock portfolio, you would have about 50 years of draws on it before it ran out." Jack grudgingly acknowledges, at least outwardly, that he doesn't need to keep the income from whatever gift is made.

Duncan runs through a few other possibilities. He knows Jack and Andrea aren't keen on one of their sons-in-law, so the idea of a generation-skipping trust starts shaping up.