Lars has seen a lot in his three decades as a CPA. One thing he's learned is that in taxes, investments, and estate planning, the most dangerous clients aren't the ones who need a lot of guidance, but rather the ones who don't need any. The ones who know it all. It tends to run in certain occupations.
Take the subject of tax-saving gifts, for instance. There are a lot of untruths and one big favorable set of truths, more so now with the new law. Here are some of the assertions he hears:
"I can only give $10,000 a year." This is the annual gift tax exclusion (actually $14,000 now), the amount one person can give any other person each year without using any lifetime gift tax exemption. But it's not really the limit. One still doesn't pay any tax as one uses the lifetime exemption (now $5,250,000 for each giver).
"OK, but I don't want to use my lifetime exemption. I want to save it for my estate." Well, it would save it not to make gifts, but once you have given away those stocks or that real estate, all future income and appreciation on the gift occurs out of your taxable estate. So it pays to use it as one can afford to.
"Let's set up an LLC and get those discounts I've heard about." Well, they aren't really discounts but rather valuations with good reason behind them. If you give children a 10% interest in a $3 million family LLC, it might be worth less than $300,000 and so use less gift tax exemption. But this comes with a price. First, it must be a family entity with good reasoning behind it, and run in appropriate fashion. Second, for the kids, a 10% non-controlling interest in a $3 million venture IS worth less than $300,000 in cash. Third, Congress and the IRS are trying to change the valuation rules. But even if they succeed, gifts will still be good in moving future income and appreciation out of the taxable estate.
"I want to give it away but keep the income." This can't be done, at least directly. A gift with retained income or use stays in the taxable estate. Like a gift of the residence with a retained life estate. But one may get some of this effect with the proper approach, for instance by selling assets to children or a trust for them.
"I've made my kids the beneficiary of the life insurance." OK, but as long as you own the policy, the policy and its proceeds are in your estate no matter who's the beneficiary. In fact even if you do give it away, it's still in your estate for another three years (unlike most assets given away).
"We had Dad sign over the property just before he died." This might have saved some estate taxes, especially the taxes of states that have no gift tax, but the benefit is undermined by potential capital gains taxes. The recipient of a gift keeps the same (often low) cost basis as the giver had. If instead one inherits property, it gets a new cost basis equal to its value in the estate.
So there are a lot of untruths. But there remains a group of very favorable truths that together go something like this. The Federal gift and estate tax exemption is large and growing with inflation, and so leaves a lot of room for gifts. In the State of Washington the new is even better: there is no accounting for gifts! So for those with more than $2 million (the Washington State estate tax exemption), tax-saving gifts should be considered, and good advice sought. This is more true, the older and wealthier one is.