Donor's Remorse

Now that 2010 finally ended and Congress finally acted with respect to the estate and gift tax, a lot of gift and estate tax lawyers and their clients are trying to figure out how to reverse taxable gifts they made in 2010. It's a classic case of "it seemed like a good idea at the time." And it did.

This was the situation: In 2010 there was no estate tax. It was scheduled to return in 2011, but with only a $1 million exemption, as opposed to the $3.5 million exemption that existed in 2009, and at a 55% tax rate. To avoid a 55% tax on estates over the $1 million exemption, many estate and gift tax lawyers advised their clients to make taxable gifts in 2010. The reasoning was, the gift tax is only 35%. Better to save 20% in taxes by making a gift now than risking dying in 2011 or after.

But in January, Congress amended the tax code to provide for a $5 million exemption ($10 million for couples) and imposed only a 35% tax rate. Now, many of those people who made taxable gifts last year are realizing that they could have avoided any tax simply by waiting. For those with estates between $1 million and $5 million, this is certainly true. So they and their attorneys are scrambling to see if there is a way to undo the gifts they made last year.

This is a classic case of people ignoring the sage advice my tax professor gave in law school: Never do anything solely for the tax consequences. Do something that makes sense from a business standpoint and deal with the tax issue at that time. The people who made taxable gifts in 2010 did so solely in hopes of avoiding a possible estate tax.

The Best Time to File Bankruptcy

Since the passage of the Bankruptcy Abuse and Consumer Protection Act in 2005, timing a bankruptcy filing has become more important than ever. First is the means test, which we have discussed previously. The means test looks at a debtor's income over the past six months, so if you received a big bonus in the past six months, you might want to wait a month or two so that bonus isn't included in the calculation of average income. Secondly, if you're facing foreclosure or having wages garnished, you probably want to file as soon as possible, like yesterday. Thirdly, if you have some cash on hand or other assets that are subject to being taken by the bankruptcy trustee, you may want to delay filing while you engage in some exemption planning. There is nothing wrong with using non-exempt assets (such as cash or selling stocks) to acquire exempt assets (such as clothes, food, a new washer/dryer or refrigerator). All of these considerations have to be weighed to determine when is the best time for you to file.