Any appreciation on the gifts or inheritances are equitably divided upon divorce.
In order to save estate taxes, efforts are generally made to reduce the value of the gifts made for gift tax purposes. Gift tax returns are often created using substantially discounted values. When the children get divorced, these values are often looked at for the purposes of establishing the initial value of the gift and calculating the appreciation to be shared with the divorcing spouse. The result can lead to unintended consequences. Instead of paying the Internal Revenue Service, parents often find that their children are paying substantial amounts in their divorces, due to the appreciation in the gifts made. You cannot have it both ways and what you save in estate taxes can often be made up in divorce settlements.
The other problem that parents may experience when gifting a fractional interest in a family limited partnerships to children
All the assets needs to be valued at the time of the divorce. By gifting away assets to children, parents are inviting a complete valuation and investigation of the family limited partnership assets. I have seen many examples of children receiving 1or 2% of a partnership that owns numerous interests in commercial or apartment buildings. The cost of valuing those interests in a divorce and then discounting for minority and marketability discounts can be enormous.
Grantor Retained Annuity Trusts (GRATS) and Qualified Personal Residence Trusts (QPERTS)
A GRAT is an estate planning tool intended to minimize estate and gift taxes when assets are transferred from one generation to another. An irrevocable trust is formed for a specific period of time. If applicable, the grantor pays a gift tax when the trust is established. Assets are transferred into the trust and then an annuity is paid out every year to the grantor. When the trust expires, the beneficiary receives the assets tax free.
Qualified personal residence trusts (QPERTS) have similar tax savings. If you transfer your home through a so-called QPERT (qualified personal residence trust), you reserve the right to maintain use of the property for a specified number of years. The property is then valued at a discount because heirs don't get immediate use. However if the Grantor dies during the period in which the Grantor has reserved the right to use the property, the QPERT is dissolved and the residence is then taxable as part of the Grantor's estate.
No clear case law as to the date when a GRAT or QPERT becomes property
There is no clear case law as to what date is used to determine when a beneficiary spouse's interest in a GRAT or QPERT becomes property and therefore subject to equitable division in a divorce.