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eas I recieved which must be shared.
The Tax
Relief Unemployment Insurance Reauthorization and Job Creation Act of 2011
(2010 Tax Act) increased the lifetime gift tax exemption to $5 million in the
year 2011, and, with an inflationary adjustment, to $5.12 million in 2012. By
its terms, the 2010 Tax Act will sunset after Dec. 31, 2012, and under current
law, the gift tax exemption is scheduled to revert to $1 million on Jan. 1,
2013. Thus, spouses who have not previously made substantial gifts have the
ability to transfer up to $10.24 million to friends and family or to trusts for
them if the gift is made before Jan. 1, 2013, with maximum rate schedules at 35
percent.
This alert
is a reminder of the opportunities that continue to be available through the
remainder of this year. It is impossible to predict whether Congress will act
to prevent the scheduled exemption reduction to $1 million in 2013, so the
amount of the gift tax exemption after Dec. 31, 2012, remains unclear. Due to
the uncertainty, it may be prudent to consider certain planning vehicles to
effectively utilize the benefits of the current exemption of $5.12 million
while it remains in the law for the next few months, even if total assets are
currently below the $5.12 million and $10.24 million thresholds.
Some of the
benefits and opportunities of a gifting program using all or a part of the
lifetime exemption are as follows:
1. Reduction
in Estate Tax: If the exemption is reduced in future years, a current lifetime
gift can substantially reduce the estate tax burden to a family on the death of
the donor. In many cases, a current gift of $5 million can reduce the estate
tax burden by 40 percent of the gifted amount, or $2 million, thereby
increasing by that amount assets ultimately available to the family, all
assuming the exemption is reduced to $1 million as scheduled. Gifts can also
reduce the state estate tax burden that exists in many states.
2. Removal
of Future Appreciation From Tax: A current gift removes any appreciation on the
gifted asset from the estate. Thus, if $5 million is given today of an asset
likely to appreciate (say real estate or traded stock interest) and the gifted
asset increases to $10 million, the $5 million of appreciation is not
includible in the donor’s taxable estate.
3. Retention
of Control and Income from Gifted Assets: Some donors are concerned over the
loss of control and loss of the income of gifted assets. It is possible to
design a gift-giving program between spouses so both spouses continue to retain
significant control over the gifted assets and simultaneously retain the
economic benefits of the gifted assets. For instance, spouses may establish
trusts for each other for their joint lives, and thereafter for family members,
utilizing their available gift tax exemptions, ultimately permitting up to
$10.24 million plus appreciation to pass to family members without estate tax
consequences. The design of such trusts must carefully conform with case law
and IRS rulings to achieve the intended result.
4. Retention
of Control and Annuity Stream for Designated Period: Gifts can also be made to
Grantor Retained Annuity Trusts (GRATs) in which the grantor retains control
over the gifted asset and retains an annuity stream for a designated period of
time, which may be many years or as short as two years. At the end of the
designated period, the asset may pass to family members without gift or estate
tax consequences, depending upon the duration of the trust and the amount of
the annuity stream passing to the grantor. To be successful, the grantor must survive
the trust term.
5.
Leveraging Gifts With Personal Residence: In the case of a personal residence,
a gift tax can be leveraged so that more than the reduced gift tax value can be
removed from the estate. This can be accomplished through an approved technique
known as a Qualified Personal Residence Trust (QPRT) in which the residence is
placed in trust for a designated period of years. During the designated period,
the donor reserves the right to continue to live in the residence. As trustee,
the donor may determine when and if to sell the residence and reinvest into a
smaller residence or retain the proceeds in the trust. At the end of the trust
term, the residence or the proceeds of sale can pass, without gift or estate
tax consequences, to family members. As in the case of the GRAT, the grantor
must survive the trust period to be successful. For example, a residence worth
$1 million could be gifted to a QPRT and the value of the gift might be only
$300,000, depending upon the donor’s age and duration of the trust, thereby
removing $700,000 from the estate, plus all future appreciation.
6.
Protection From Creditors and Spousal Claims: Gifts can be directed to pass to
trusts for family members in a manner that protects the assets from the
potential creditors of the donees and from matrimonial claims of spouses of
donees.
7.
Charitably Minded Gifts: Charitably minded donors can benefit by making gifts
to Charitable Lead Trusts, which accomplish the following:
a. Providing
an annual stream of payments to favored charities,
b. Assuring the underlying principal of the trust will eventually pass to
family members,
c. Avoiding gift and estate tax consequences associated with the gift, and
d. Creating current or future income tax benefit to the grantor by reason of
the gift
8. Grantor
Trusts – Tax-Free Gift of Income Tax to Donee: Trusts can be designed to
benefit both children and grandchildren, all without gift or estate tax
consequences or income tax consequences to the donee. The grantor of the trust
incurs the income tax generated by the transferred assets, thereby creating an
additional tax-free gift to the trust. If the grantor sells assets to the
trust, the grantor could retain a stream of payments, income tax free, while
heirs enjoy the gift and estate tax benefits. This type of trust is a grantor
trust.
9. Life
Insurance and Leverage: Life insurance is a method to leverage your gift tax
exemption. If single premium life insurance policy is purchased for (say) $5
million, depending upon the age and health of the insured, multiples of $5
million (in the form of insurance proceeds) can pass to trusts for children and
grandchildren by utilizing the $5 million lifetime exemption and avoiding
estate and generation-skipping transfer (GST) tax on the enhanced insurance
proceeds.
Check with your CPA, tax Attorney or Financial Advisor more information.
CBlakely CFP® CTFA Sept. 2012
Source: Fox Rothschild, LP.
