Many high-net-worth individuals and their families have taken advantage of the increased lifetime federal gift tax exemption amount, adjusted for inflation in 2012 to $5.12 million. As this regime is set to expire at the end of the year, clients and advisors have been actively planning using this exemption amount. However, many are still unsure of whether they should take advantage of this limited time offer.
It may be helpful for these undecided individuals and their advisors to know which strategies other high-net-worth individuals have utilized. Compensation Strategies, Inc. (CSI), a consulting firm in New York, illuminated the most valuable gifting approaches in a recent survey of professional advisors. CSI questioned a number of professional advisors regarding the top strategies chosen by their clients with respect to this large federal gift tax exemption. The survey's purpose was to illustrate the gifting options available to high-net-worth individuals and to highlight the opinions of professional advisors regarding these various options.
Survey Methods
CSI and several professional colleagues first identified the following possible gifting options:
- Establishing a residential trust;
- Making outright gifts to family members;
- Creating a dynasty trust for the benefit of family members;
- Establishing a trust with flexibility for spousal access;
- Setting up an irrevocable life insurance trust (ILIT) and transferring ownership of an existing policy;
- Creating an ILIT funded with a new policy;
- Transferring property with high potential for appreciation;
- Transferring non-controlling interests in entities, for example, a family limited partnership (FLP), into a trust;
- Funding a grantor retained annuity trust (GRAT);
- Creating an intentionally defective grantor trust (IDGT);
- Sprinkling the gifts among multiple structures and/or beneficiaries;
- Avoiding estate taxes by gifting most of the estate to charities;
- Previously transferring most assets to an FLP or similar entity; and
- Having the means, but deciding against heavy immediate gifting.
CSI then asked a small group of professional advisors to identify the six techniques that they had recommended most often to clients and/or that had been chosen the most frequently by clients and to rank these top six options from 1 to 6, with 1 being the best. There were no restrictions on the criteria advisors could use when creating their ranking; some focused on the number of positive client decisions, whereas others made their decision based on which options best suited their clients’ goals. CSI then analyzed the advisors’ rankings using a number of metrics, such as how often each option was cited, the importance of each option (that is, its average score from 1-6) and the total number of points (based on the advisors’ rankings from 1-6) each option received.
Dynasty Trusts are Winners
The results offer important insights regarding the choices of high-net-worth individuals and their advisors. First, the options that advisors most frequently mentioned to their clients were respectively: (1) establishing a residential trust, (2) transferring property with high appreciation potential, (3) creating a dynasty trust, (4) making outright gifts, (5) establishing an ILIT funded with a new life insurance policy, and (6) creating a GRAT. The options that advisors considered most important, based on the average score of each option from 1-6, were respectively: (1) creating a dynasty trust, (2) making outright gifts, (3) establishing a GRAT, and (4) creating an ILIT funded with a new policy. Interestingly, the suggestions of establishing a residential trust and transferring property with high appreciation potential only ranked in the middle of the pack with respect to their level of importance, even though these techniques were mentioned the most frequently by professional advisors.
Finally, CSI ranked each technique based on the total number of points each one received in the survey. This revealed the following hierarchy, which is a combination of the frequency and importance measures described above:
- Create a dynasty trust;
- Create an ILIT (funded either with existing policy or with a new policy);
- Establish a residential trust;
- Make outright gifts to family members; and
- Transfer property with high appreciation potential.
Tips for the Undecided
While this survey was composed of a small sample size and was far from scientific, it reveals important information about how professional advisors view the various gifting options available to high-net-worth individuals and their families in light of the increased lifetime gift tax exemption. For instance, advisors in the survey consider the creation of a dynasty trust to be, perhaps, the most valuable approach for many clients, while creating a trust with flexibility for spousal access isn't a very common technique. The insights gleamed from CSI’s survey will help to create a dialogue between advisors, for example, regarding how to best use the more valuable techniques. In addition, for those clients who are undecided regarding how to use their federal gift tax exemption before the current regime expires at the end of the year, CSI’s survey may assist advisors in identifying which options they should focus on with these clients.
