Estate Planning – The Giving, Asset-Shifting Opportunity

A unique wealth and Estate Planning opportunity presents itself to many people in 2012. It could be the last year for such an opportunity, so take advantage if it applies to you.

A deal was reached in Washington in December 2010 to reduce estate and gift taxes for 2011 and 2012. Among other things, a lifetime exemption of $5 million for estate and gift taxes was created. The exemption applies only to estates of those who pass away in 2011 or 2012 and to gifts made in those years. (Details of that law are in our February and March 2011 issue. These are available on the members’ web site under either the Back Issues tab or the Estate Watch section of the Archive.) At the time many people assumed the exemptions would be extended routinely in the future or made permanent. Now, the political climate and fiscal situations have changed. Many people believe the exemptions are likely to shrink either by congressional action or because Congress fails to act. If Congress can’t agree on a permanent law by the end of 2012, the old law with a $1 million lifetime exemption automatically returns.

Those with valuable assets who are concerned the estate and gift tax exemptions might shrink should consider taking action in 2012. Another reason to take action in 2012 is that many policymakers want to restrict or eliminate some valuable estate planning strategies. Even if the exemption remains high, 2012 could be the last year to take advantage of strategies that have been on hit lists, such as family limited partnerships, Crummey trusts, irrevocable life insurance trusts, and more.

You can move up to $5 million of assets to other family members in 2012 free of gift taxes. This will permanently remove these assets and their future appreciation from your estate, so they’ll avoid estate and gift taxes regardless of the tax law in effect when your estate files its tax return.

There are many ways to take advantage of the $5 million exemption.  Of course, you can make straight gifts of money and property to others. But that’s not the best way to take advantage of this opportunity. Gifts can be leveraged, increasing the amount you can transfer tax-free, by using strategies such as those mentioned above.

Business and real estate owners can use vehicles such as family limited partnerships to transfer more than $5 million of value to others, while still retaining significant control of the daily operations. Other assets can be transferred using leveraging strategies such as grantor retained annuity trusts (GRATs), private annuities, partnerships, and irrevocable trusts.

You can use life insurance and a dynasty trust to create a fund that will provide wealth for your generation for generations. A residence or vacation home can be put into a personal residence trust to shelter wealth at a reduced gift tax cost. You also can sell assets to family members through an installment sale.

Appreciating assets can be transferred through an intentionally defective grantor trust. This is a sophisticated tool, but it’s a way to increase the amount that is passed to the next generation free of gift taxes. GRATs also are a good tool for transferring appreciating assets and are regularly on the short list of strategies the IRS wants to end.

There are a number of ways to avoid or reduce gift taxes. Perhaps the last, best opportunity to avoid gift taxes on significant wealth and future appreciation will be 2012. The future of estate and gift taxes will depend largely on the results of the 2012 election. You can review the Estate Watch section of the Archive on the members’ web site to get some ideas and details on strategies. Begin working with an estate planner early in 2012. Develop ideas for minimizing taxes and implement them by the end of the year.

RW January 2012.