The “fiscal cliff” tax fix, known as ATRA, matched the federal lifetime gift exemption of five million dollars to the federal estate tax exemption amount; also five million dollars. Coincidentally (and beneficially for Maryland residents), Maryland has no gift tax. Therefore, many families are able to accomplish a significant, tax-efficient, transfer of wealth to the next generation by the use of gifts. The question, however, is whether such a transfer makes good sense for both the donor and the recipient.
If the gift-donor gives away their assets too soon, then they may find themselves without sufficient resources to continue the lifestyle they desire. If the gift-recipient receives gifts of money or other assets outright, their creditors (either known or unanticipated) or predators (individuals who have the bad habit of sniffing out unprotected assets and opportunities to grab those assets) may enjoy a windfall. Unfortunately, the recipient then ends up with far less inheritance than they expected. One straightforward means of addressing such concerns is to minimize the Maryland estate tax by reducing the donor’s assets to less than one million dollars while gifting the balance of the inheritance, in trust, to the next generation.
A Gift Trust with the proper provisions and beneficiary designations can prove to be a three-fold gift to the subsequent generation. First is the gift of hard-won assets accumulated and passed down to the recipient generation. Second, the assets are protected from both creditors and predators of the recipient generation. While the recipients enjoy the benefits of the assets in trust, their demand rights to control those assets can be limited, or safeguarded, so as to cut off the ability of any creditors or predators to reach the assets in trust. A Gift Trust’s third gift is the savings of estate taxation on the gifts transferred in trust. (Maryland’s estate tax has a rate of sixteen percent (16%) and the calculations begin at the first dollar in excess of one million dollars in the ownership, possession, or control of an individual at the time of death.)
Of course, the intersection of estate and trust tax law and the transfer of property to the next generation in your family will benefit from an in-depth analysis as to the selection of assets, as well as the structure and timing of a tax-efficient transfer.
The old saying that “The two things which are certain in life are death and taxes” may be true, but at least one of the two can be minimized by advanced planning.