Welcome to Luca!globe
Estates & Trusts Current Issue!    Navigation Tips!
Main Menu
CPA Journal
Professional Libary
Professional Forums
Member Services



By Scott Ditman, CPA/PFS, and Neil S. Lowenthal, JD, LLM, David Berdon & Company

Most people want to minimize their current tax liability and defer the payment of taxes, thinking that the more taxes paid today, the less money they will have for tomorrow. Yet under our estate and gift tax system, deferring taxes, may not be the best strategy if the goal is to minimize what you give to the government and maximize what your heirs will ultimately receive.

By making lifetime taxable gifts in excess of the unified credit amount of $600,000, you can provide even more for your heirs. One reason is that any post-gift income or future appreciation related to the property transferred will not be subject to estate tax in the donor's estate. Another reason is that if the donor lives at least three years from the date of the gift, any gift tax paid is also removed from the estate, further reducing the amount subject to estate taxes. Since the Federal estate tax climbs to an imposing marginal rate of 55% on taxable estates over $3 million, making taxable gifts may significantly increase the amount left for your beneficiaries.

Make the Most of Tax-Free Gifts

Before making taxable gifts, there are certain planning opportunities that should be fully exploited. One of the biggest tax breaks available is giving up to $10,000 a year to any number of individuals without the transfers being subject to gift tax‹as long as the gifts are considered present interests. If the taxpayer's spouse joins in making the gifts, the break doubles to $20,000 per donee. So, if a married couple has a child who is married with three children, the couple could give away $100,000 a year ($20,000 per donee). Over 10 years, that would remove $1 million from the couple's estate. In addition, any post-gift income and appreciation related to the gifted assets would be removed from the estate and excluded from estate taxes.

An estate can be further reduced by paying the educational, or medical expenses of any individual. These gifts are not subject to the $10,000/$20,000 annual exclusion limitation, as long as the payments are made directly to the organization providing the service.

Gift and estate taxes are structured under one system. So, in addition to gifts covered by the annual exclusion, an individual can give away up to $600,000 either during his or her lifetime or at death without triggering Federal gift or estate tax.

The Advantages of Making Gifts in Excess of $600,000

By making gifts in excess of $600,000 during your lifetime, heirs can end up with even greater amounts after all taxes have been paid. The true impact of what goes to taxes versus what is left for heirs is illustrated in the examples below.

Example No. 1: Mr. Greene, a widower, is considering making a $2 million gift to his children. Assume that he is domiciled in New York State and is in the highest Federal and state gift tax brackets. If he gifts $2 million he will owe $1,520,000 of combined Federal and New York State gift tax. Also, assume that Mr. Greene will live another 10 years and that assets grow at an annual after-tax rate of 6%. As indicated in the accompanying table, by making the $2 million gift, Mr. Greene will have transferred additional wealth of $1,060,181 to his children. The longer the donor lives after the gift is made and the greater the rate of return on the gifted assets, the larger the amount of additional wealth the family will receive.

Mr. Greene has not only removed any post-gift income and future appreciation from his estate, but also, since he survived the transfer by three years, the $1,520,000 of gift tax that he paid is also out of the estate, further reducing his estate tax liability. The key to this planning technique is that the gift tax is calculated only on the amount that is actually transferred, while the estate tax is computed on the entire estate, which includes the portion of the estate that is used to pay the tax. Even though Mr. Greene had to pay gift tax currently, he was able to transfer over $1 million more to his children.

Example No. 2: What would the results be if Mr. Greene passed away within two years of making the gift? As shown in the Table, if the taxpayer were to die within three years of making the gift, the law requires an additional estate tax on the gift tax previously paid. In determining the additional estate tax due, only the Federal gift tax is subject to Federal estate tax and correspondingly, only the New York State gift tax paid is subject to New York State estate tax. Even though Mr. Greene passed away within three years of making the gift, he was still able to transfer an additional $147,971 to his children.

Making lifetime taxable gifts can be a tremendous planning opportunity. No one likes to pay taxes before they have to, but by making gifts in excess of the $600,000 exemption amount and paying gift taxes currently, an individual can potentially pass on a significant amount of additional wealth to family or other beneficiaries. However, planners need to consider proposed legislation in the estate and gift tax area before implementing this strategy. *


By Fredric J. Laffie

Yesterday's insurance products were quite easy to understand. You had a choice of whole life or term life. Today, we have annual renewable term, guaranteed level term, universal life, variable universal life, variable whole life, blended whole life and term, second-to-die (universal, variable, whole life, and blends), and first-to-die written on a minimum of two lives. In addition, there are hybrids of the above mentioned products.

Can the consumers possibly understand what they are buying? Unfortunately, more often than not, they are buying illusions. Variable life "illustrated" at a 12% return or, even worse, on an historical basis or universal life illustrated with assumptions that interest rates will increase in years 11 through 15, 16, through 21, and thereafter are just examples of what is being presented by insurance agents. With the age of computers, the agent can qualify as an illusionist, somewhat like Siegfried and Roy. Illusionists make tigers disappear. Many products being sold today also will disappear when you most need them!

One major life insurer has decided that unless a policy illustration "holds up" after reducing dividends by 11*2% they will not permit the agent to make the sale. Unfortunately, when presented in a competitive bidding war, the legitimate insurance professional is at a disadvantage. Unless professionals such as CPAs and attorneys take a more active role with the clients, more often than not, the proposed insured will probably be duped or not truly understand the potential pitfalls of the products purchased.

Are all agents trying to fool the public? I believe the answer is no. I also believe, however, that many agents are selling products that they don't thoroughly understand. Is that as bad as duping a client? I'm not sure, but the outcome could be similar!

How many clients buy insurance as an "investment"? Great deal? Wrong! How many individuals buy insurance and are told, "You only pay ten premiums and the policy is paid in full." Wrong! Some policies that have been sold this way will never vanish. There are some class action suits against some major insurance carriers due to these misleading sales practices.

The September 18, 1995, issue of the National Underwriter correctly points out that some policies purchased in the late 80s had projected to pay premiums for 10 years "give or take a few years." The premiums will end up being paid for as much as 30 years. This is due to significant declining investment returns translating to reduced dividends.

Unfortunately, the above scenario becomes magnified when whole life contracts are aggressively blended with term insurance. These products are like "mixing prescription drugs with alcohol." Keep in mind, the more nonguaranteed term we mix with whole-life contracts, the more sensitive these products become to dividend reductions.

The reason people buy whole life is for the guarantees. If we are too aggressive with the term blend, we might as well buy universal life, which also lacks many guarantees but could be more flexible and have better loan provisions.

Recently, I was asked to review an existing policy that was sold when dividends were quite high. The insureds are now over 70 years of age and the surrendings of paid-up additions to pay for the term insurance portion of this policy are inadequate. The insureds knew this could happen but were told that they could increase the premium at any time. In New York State, this particular product does not allow for additional monies to be added, thus the insurance coverage will have to be reduced. These individuals had thought they purchased $10 million of second-to-die insurance. At the end of the year, however, the coverage will drop to about $8 million and further drops could follow.

Illusions, illusions, illusions‹a conservative approach is the answer. As is an insurance professional who can explain the pitfalls of each product. There are no perfect products. Insurance carriers ratings, dividend history and mortality margins (death claim experience) should be reviewed. Even with a reduced dividend scale, are mortality charges guaranteed?

As a former practicing CPA and now an insurance specialist, I have seen both sides of the coin. Caveat emptor! *

Fredric J. Laffie, CPA, operates his own insurance firm in Syosset, NY.

Marco Svagna, CPA
Lopez Edwards Frank & Company

Edward A. Slott, CPA
E. Slott & Company

Contributing Editors:
Richard H. Sonet, CPA
Zeitlin Sonet Hoff & Company

Lawrence M. Lipoff, CEBS, CPA
Lipoff & Company, CPA, PC

Frank G. Colella, JD, LLM, CPA
Own Account

Jerome Landau, JD, CPA
Eric Kramer, JD, CPA

Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, PC

James McEvoy, CPA
Chemical Banking Corporation



Example 1 Example 2

10-year Scenario 2-year Scenario

If $2 Million Gift If No Gift If $2 Million Gift If No Gift
Is Made Is Made Is Made Is Made

Current Value $3,520,000 3,520,000 $3,520,000 $3,520,000

Less: Gift Tax on the $2 Million Gift @ 76%
(Fed=55% + NYS=21%) (1,520,000) -- (1,520,000) --

Net Current Value 2,000,000 3,520,000 2,000,000 3,520,000

Net Current Value
@ 6% After Tax Rate $3,581,695 $6,303,784 $2,247,200 $3,955,072

Less: Estate Tax @ 60%
(Fed=55%-State Death
Tax Credit=16%+NYS = 21%) -- (3,782,270) -- (2,373,043)

Subtotal 3,581,695 2,521,514 2,247,200 1,582,029

Less: Estate Tax Due to

Addback of Gift Tax Paid:
Federal [($2,000,000x55%) X39%] -- -- (429,000) --

NYS ($2,000,000x21%)X21%) -- -- (88,000) --

Net Amounts Passing to Beneficiaries $3,581,695 $2,521,514 $1,730,000 $1,582,029

Additional Wealth Transferred by Making Gift $1,060,181 $147,971


The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices

Visit the new cpajournal.com.