Many people think of gifting as simply writing a check or transferring property to a loved one. For individuals with substantial estates, however, gifting strategies may need to be considerably more sophisticated.
One approach sometimes discussed in estate planning involves a leveraged lifetime gift, which generally allows the transfer of wealth during a person’s lifetime while making strategic use of available gift and estate tax rules.
How leveraged lifetime gifts work
Making a leveraged lifetime gift involves structuring a transfer so that the potential long-term benefit to beneficiaries exceeds the taxable value of the initial gift. Depending on the strategy, an individual might transfer assets with significant appreciation potential or use trusts and other planning techniques designed to shift future growth outside the taxable estate.
For example, certain strategies involve placing assets in an irrevocable trust while retaining particular rights or receiving payments for a specified period. If properly structured, the taxable value of the gift may be different from the property’s ultimate value received by beneficiaries. Other arrangements may combine gifts with loans, sales or life insurance planning.
Why make a leveraged gift during life rather than simply leaving assets through a will? One potential advantage is moving future appreciation out of the donor’s estate. If transferred property substantially increases in value over many years, that growth may occur outside the donor’s taxable estate, depending on how the transaction was structured.
These strategies are not appropriate for everyone. Giving away assets can mean surrendering control, and transfers to irrevocable trusts can be difficult or impossible to reverse. Income tax consequences, basis considerations, liquidity needs and changing tax laws must also need to be evaluated carefully.
Yet, with appropriate legal and tax guidance, lifetime gifts can potentially transfer future appreciation efficiently while preserving an estate plan designed around an individual’s financial needs and family objectives.