Source: Lexology —
In brief
A fundamental estate planning principle frequently discussed when I was a student studying for my LL.M in the Estate Planning program at the University of Miami, and which remains a teaching point to this day, is that it is better to gift assets before they further appreciate in value. I recall professors sharing examples of estate planning benefits that would have resulted if one had gifted certain stocks before an IPO or before specific assets had significantly appreciated in value.
The common assumption has been that gifting assets that one anticipates will appreciate in value in the future is a good thing because it results in a gift tax saving and removes them from the donor’s estate. The reasoning for this argument is that the gift freezes the value of the assets (as to the donor) for transfer tax purposes. Thus, if the assets appreciate in value after the gift, the donor or donor’s estate will not owe additional transfer taxes on any future appreciation.
This article appears in the first edition of the Private Wealth Newsletter 2023.
In more detail
As the global markets emerge from the COVID-19 era with some asset values trending lower, coupled with the US federal gift, estate and generation skipping transfer (GST) tax basic exclusion amount set to return to its 2017 level at the end of 2025,1 many estate planners believe now is the perfect time to transfer to younger generations assets anticipated to appreciate in value. For most of my professional career, I have worked and advised clients along this premise; however, I am beginning to realize that perhaps this common perception is not always correct.
In this short article, I will explore the potential flaws in this line of reasoning. I acknowledge that some readers will find this article somewhat controversial and counterintuitive. And further, in more instances than not, I will continue to advise clients to consider the future appreciation of their assets while planning their estates. However, the point here is to illustrate that anticipated appreciation of asset values does not always occur and, actually, values can decline (and even become worthless) and result in negative economic consequences for the donor (and sometimes the donee).
At the outset of the planning process, I believe practitioners should consider the following points when evaluating whether a client should gift an asset that they believe or hope will appreciate in value:
- Is the client certain the value of the asset will not decline?
- Is it possible that the value of the asset could decline significantly or even become worthless after the transfer?
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