ABOUT THIS WEBSITE:
The intent of this website is to communicate the potential benefits of lifetime gifting and its impact on an estate planning strategy. It is important to understand that, although every effort was made to ensure the accuracy of the calculations in this web application, the application should not be perceived as a planning tool. The site is for illustrative and educational purposes only. To determine whether a lifetime gifting program is appropriate for your situation, you should seek the advice of tax, legal and financial advisors.
In order to simplify the presentation of this topic, several assumptions were made. Please review them, below:
1. Growth Rate: The growth rate for this website was locked in at 4% for all assets: those gifted and retained. Of course, this is unrealistic and could even be regarded as aggressive, considering the economic environment that began in the late-2000s. No one can accurately predict the growth of assets. Additionally, classes of assets can grow at significantly different rates. Ideally, one looking to reduce their estate tax exposure would gift assets with a higher growth potential (see About Lifetime Gifts section below). Before considering a lifetime gifting strategy, a thorough understanding of the growth potential of an estate’s assets is necessary.
2. No Prior Gifts Made: The examples in this website assume that no prior gifts were made by Ben or Karen. Prior gifts (over an annual exclusion amount) will reduce the amount of the exemption available for current and future gifting.
3. Level Annual Exclusion Amount: In the portion of the website’s calculations addressing annual gifts to an Irrevocable Life Insurance Trust, the annual gift tax exclusion is used to minimize gift taxes. Since 1932, individuals have been able to gift an amount, each year – gift tax free – for the benefit of someone other than their spouse. In 1997, the amount was legislated at $10,000 and set to inflate in $1,000 increments. As the increments are tied to the CPI, it is impossible to predict when the annual gift amount will be increased. Therefore, the calculations in this website have assumed a level annual gift exclusion of $13,000 per person (i.e., $13,000 for single, divorced and widowed examples and $26,000 for married).
4. Simultaneous Death in Married Examples: To simplify the scenarios in this website, when the example displays a married individual, it is assumed that both die on the same day. Therefore, there is no growth of assets between deaths. Furthermore, it is assumed that the unnamed spouse is the first to die and that the unnamed spouse takes full advantage of the estate tax exemption available in the projected year of death, then utilizes the marital deduction to leave the balance of their assets to the named spouse (i.e., Ben or Karen).
5. No Claw-back: For gifts made in any year when the exemption amount is legislated to be less during a projected year of death than it was in the gift year (e.g., gift in 2012 and death in 2013), this calculator assumes that there will be no “claw-back.” The term “claw-back” refers to situations where a tax benefit that is utilized in one year, and legislated to decrease in a future year, will not be reversed by the IRS. For example, in 2011, the exemption amount was $5,000,000 and the amount legislated for 2013 was $1,000,000. The assumption is that the IRS would not penalize a person’s gift over $1,000,000 in 2011, if they died in 2013.
ABOUT LIFETIME GIFTING
The two primary determinants in the potential success of a lifetime gifting program are as follows:
1. Past, Present and Future Estate and Gift Tax Environment: The future legislative environment surrounding estate and gift taxation is unpredictable. Irreversible decisions made in the past or current tax environment may be rendered ineffectual by future legislation. For example, if a person of wealth gifted the maximum exemption amount in 1995 ($600,000), for the sole purpose of reducing their family’s estate tax bill at death, and then that person died in 2010, when estate taxes were completely repealed, then the lifetime gifting strategy achieved nothing. What is the future of estate taxes? No one knows. What is known is that, as of this writing, there has been an estate tax for every year since it was enacted (in 1916), except one: 2010.
2. Growth of Gifted Assets: Essentially, gifted assets do not escape taxation. If we assume, for a moment, that the exemption amount (the amount you can pass to a non-spouse without taxation) were to remain the same year over year, then utilizing the exemption during life simply means that it would be unavailable to utilize at death. So why gift? To remove the growth on assets from taxation. If a $600,000 asset were gifted ten years ago and this year the individual died, that gift would be brought back into the estate tax calculation at its original value – not at today’s value. If the asset had doubled in value in those ten years, then an extra $600,000 will escape taxation.
But, what if the asset did not grow, but decreased in value by half? Then, the estate taxes would be paid at a $600,000 level, when the asset is only worth $300,000 – meaning that the gifting strategy actually increased the estate tax bill. Had the asset not been gifted, then it would have been run through the estate tax process at the $300,000 amount. From this example, one can see that, if the goal of a lifetime gifting strategy is to reduce estate taxes, then the assets to be gifted should be those with strong growth potential.
ABOUT AMERICAN GENERAL LIFE COMPANIES:
American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers, including American General Life Insurance Company (AGL) and The United States Life Insurance Company in the City of New York (USL).
Please note that AGL and USL are solely the providers of the insurance products. The companies, its employees, agents, representatives, and its affiliates do not provide tax, legal, or financial advice. No representation or warranty, express or implied, is made by AGL, USL and its affiliates as to the completeness of the information in this presentation.
It is strongly suggested any individual should consult their personal tax, legal, or financial experts or advisors with any questions prior to gifting assets or to determine the effect of estate taxes on their factual situation.
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