Give It Away Now: Shrinking Swollen Estates Before It’s Too Late

Give It Away Now: Shrinking Swollen Estates Before It’s Too Late

“Holiday gift-giving gives me a pain in my big broad – Bertie! Stop that!”

So said my supervisor just a moment ago, chastising her cat, this timely interruption preserving decent language for the holidays. Rebecca loves this time of year, but buying presents is tricky when people are grown. We buy anything want year-round; a friend needs a pick-me-up, you treat them to pizza or whiskey. Holiday giving is stressful, demanding – and it doesn’t quite dovetail with a pandemic.

It’s not that Rebecca isn’t generous. My iPad, iPhone and – what are they called, these pod-phones? I recoil from plugging Apple products too hard, absent promotional consideration. She passes sweet hand-me-downs, all fully functional, and they’ll remain in my mitts for years – we Yankees (New England-style, not those NY lads in pinstripes, forsooth) make the buck talk, even if shoehorned from someone else’s wallet.

Rebecca’s all about the spend-spend. She’s forever filling her pumpkin-orange convertible with treasures and treats. I scold impecuniosity, warn her to save, but sometimes I concede, she’s recklessly kind. In Moscow in 1996, when we suffered the poverty of youthful stupidity, she gave 20% of our paltry cash stash to an old lady, a babushka, begging at the metro. “I just had to,” Rebecca wailed, apologizing to an audience of sympathy. First things first, I said, telling her what she already, heartfelt fathomed.

There are good reasons to give at Hannukah, Christmas or any holy time, when merry ladies and gentlemen might celebrate. Year-round, I see folks giving for no seasonal reason – to brighten a day, lighten a load, show that they care without soupy sales-talk. It’s kind of what money is for.

In the 1970s, I was ever asking daddy-o for cash. He’d yell, he’d holler: “Five bucks – what are you, nuts?” I’d plead the fifth, as today. But then: “What the heck can you do with five dollars?” And he’d ‘duke’ me a ten. Dad got to blow, get oxygen to his brain, teach his son about negotiation, and the concept of ‘enraged affection’. Dad liked to give it away; it just made his wallet sore.

The open hand is magnificent, but our old friend the pocketbook, we must ever consider the pain caused her by emptiness. Sometimes, too, you must look out for yourself. If that’s hard to admit, recall how your interests can suddenly turn into quite somebody else’s.

Take your estate: a bedrock of planning is to minimize tax risk. You hope to preserve your estate for a surviving spouse, the children, grandkids. Charitable causes are always in need – remember our babushka? She’s standing on a street corner somewhere, maybe on your block. Someone needs to fill her fridge, her prescriptions. The wealthy commonly step up, despite what partisan critics says. Never mind, I don’t think they do it for the press.

Let’s run down the case: under the current tax regime, it’s an unprecedented time for giving. The federal estate and gift tax exclusion sits at $11,580,000 per individual, double that for married couples. When it comes to passing on wealth, major estate holders are seemingly sitting pretty.

Here’s the big ‘but’: at midnight, December 31, 2025, the exclusion will be unceremoniously hacked in half, and that’s if we’re lucky. President-elect Biden has promised to spare the cherry trees and take his axe to the elevated exemption. Biden has other tax-boosting plans, but none seem extreme and the wealthy can shoulder the cost, I think. The exclusion affair is more worrisome, and you should pay closest heed.

A quick aside: keep your eyes on the Senate runoff in Georgia. If the Republicans win one of the two contested seats, they’ll maintain control of that body. If the Democrats grab both tickets, they’ll be in the driver’s seat. The races are too close to call. Early voting is underway, and the general poll is on January 5, 2021. Relax, enjoy the holidays, then turn a peeled eye to this vital election.

Dire financial conditions argue for paring your estate today. The pandemic has squashed asset values and interest rates globally are historically low. Growth should start to recover next year, a double-edged sword, given uncertainty over taxes. Warning to the wealthy: give now lest rapid portfolio growth swells your estate into high-tax terrain.

A nice tool for accomplishing this goal is a Spousal Lifetime Access Trust. SLATs are irrevocable, launched by one spouse to benefit the other. When the grantor spouse dies, the SLAT pays out to the spouse beneficiary. SLAT assets are excluded from the grantor’s estate, protecting them from estate taxes. They have many other benefits, these SLATs, including a measure of bankruptcy and litigation protection for its assets.

We love SLATS. As with all complex products, you’ll have to watch out for a few catches. Spouses often construct two SLATs reciprocally, that is, husband for wife and wife for husband – other combinations are possible today. It sounds a clever way to double the benefits, but the spoilsport IRS can pip the unwary at the post.

If the dual SLATs’ provisions bear too-close resemblance, the authorities can strike down the structure under the reciprocal trust doctrine. The details convolute – consult your estate planners – but the essence is chillingly simple: under this ruling, the two SLATS are “uncrossed,” in the jargon. The trust grantors are then treated as beneficiaries of their own largesse: the assets effectively return to the couple’s estates, the trust benefits unravel, and the tax man rattles his chains, leaving your lovely stocking swollen with lumps of hard coal. For the IRS, every day is a ghostly Christmas eve, those old Scrooges.

You can dodge this bullet by crafting each SLAT with different conditions. One spouse might focus their trust on providing for the children; the other, for charity. A couple can still work in combination, gain the combined benefits of today’s heightened exclusion, and hold the IRS at bay. All you need is professional consultation.

If a SLAT’s been on your mind, I hope you’ve learned something new. Call your estate planner and astonish them with your acumen, and if you’re keen to proceed, tell them to get cracking. There’s still time, but don’t waste a second. A nerve-wracking New Year draws nigh.

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