Estate Taxes in Flux – Take Advantage of Gifting in 2012
On December 17, 2010, President Obama signed into law the 2010 Tax Act, which changed the estate, gift and generation-skipping transfer taxes. The 2010 Tax Act (1) set the gift and estate tax exemption at $5,000,000, which for 2012, as a result of inflation indexing, increased to $5,120,000, (2) reduced the estate and gift tax rate to 35%, and (3) re-unified the estate tax exemption with the gift tax exemption, so that the increased estate tax exemption amount is also available for gifts.
However, the 2010 Tax Act only extended the Bush tax cuts temporarily for 2011 and 2012. Its provisions “sunset” on December 31, 2012, and in the absence of further legislative action (and in an election year, many believe that such legislation is unlikely), on January 1, 2013, the estate and gift tax exemptions will be reduced from the current $5,120,000 to $1,000,000, and the tax rate will be increased from the current 35% to 55%. Factor in additional state estate taxes owed in jurisdictions such as New York and New Jersey, and the total death tax could exceed 70%, an astonishing number.
If Congress does nothing and allows the 2010 Tax Act to expire, there will be a $1,000,000 exemption and a 55% tax rate as of January 1, 2013.
Clients have a fleeting opportunity during the remaining months of 2012 to make significant gifts to utilize all or part of the federal $5,120,000 exemption. Thereafter, the exemption – and this window of opportunity – may be lost. Many clients are best advised to take advantage of the 2010 Tax Act before its expiration (lock in the $5,120,000 gift tax exemption before it is lost - “use it before you lose it”).
There are a number of strategies that a client can employ to lock in the use of their $5,120,000 gift and generation skipping tax (“GST”) exemptions before they are lost. The right strategy depends upon your financial circumstances, the nature of your assets and your intended beneficiaries. One or more of the techniques listed below may be an appropriate way to utilize this gifting opportunity:
- Gifts to Spousal Gift Trust (for Spouse and/or Other Family Members)
- Gifts to Self-Settled Trusts
- Gifts to Dynasty Trusts for Children and Grandchildren
- Qualified Personal Residence Trust
- Grantor Retained Annuity Trusts
Advantages of Gifting:
- Flexibility. Gifting assets to a trust removes the assets and their appreciation from your taxable estate. If you are married, a gift to a trust can be structured so that your spouse can be the primary beneficiary of the trust. This allows the assets to be removed from your taxable estate while still being available to your spouse (and indirectly, to you).
- Asset Protection. Several of the trust options offer significant asset protection.
- Multi-generational planning. Trusts can be structured to benefit multiple generations (children, grandchildren and great grandchildren) by continuing to hold property in trust for each generation with the assets in the trust not being subject to estate tax or generation skipping transfer tax.
- Upon the death of your spouse, the assets can continue in trust for the benefit of your children and grandchildren. With careful planning and some restrictions, each spouse can create and fund his or her own Spousal Gift Trust so that each can use their respective $5,120,000 gift exemption.
- Self-Settled Trusts for asset protection. Generally, you cannot create a trust for the benefit of yourself while receiving asset protection. However, under the right circumstances it may be possible for you to make a gift to an irrevocable trust and include yourself as a beneficiary of that trust, AND still remove the assets from your taxable estate when you die AND remove the assets from the reach of your creditors. Such a structure may be desirable if you want to maximize your gifting but you are reluctant to irrevocably part with assets due to future uncertainty.
- Valuation Discounts. Valuation discounts are available under certain circumstances for assets gifted into trusts. These discounts can turbocharge the estate and gift tax savings available using various trust strategies.
Our experienced estate planners and tax advisors can discuss whether and how to implement a gifting program this year.