Thank Congress if You Made Big Gifts in 2012

Am Tax Rel Act

Hank Wittenberg has a great article on estateplanning.com on why those of you who did year end planning in 2012 made the right choice, even though Congress extended the generous gift and estate tax exclusions with the American Taxpayer Relief Act.

The tax act signed into law by President Obama last week provided some very good estate planning provisions. Surprisingly, I have already read and heard complaints from other estate planning attorneys that this new tax act renders the 2012 year end gifting a “waste of time.” This is absurd; quit your whining! These are the same folks who complain that their clients would not make any significant gifts in spite the significant benefits that go with it, tax and otherwise. The one good thing about the “fiscal cliff threat” is that it convinced some to implement plans that should have been implemented already.

He also adds his top 10 estate tax and gift tax benefits of the new law:

1. Predictability: Taxpayers now have some reasonable estate tax expectations for the foreseeable future so they won’t be paralyzed by “what Congress might do in the future.”

2. Unified Gift and Estate Tax: Since the exemption amount for an estate is now permanent there was no need to split the gift tax exemption and the estate tax exemption like it was in the 2001 law. This structure is easier to understand and planning can be more straight-forward.

3. Generation-Skipping Transfer Tax: Having the same levels makes planning for multiple generations simpler (but still not without traps for the unwary).

4. Indexing: The exemption amounts are indexed for inflation, providing even longer term clarity in planning that is aligned with real economic effect.

5. Rate: The current maximum estate tax rate for estates with more than $5,250,000 in 2013 is 40%. Yes, I see this as beneficial. Perhaps it’s my age but is seems like it was only yesterday that the maximum estate tax rate was 55% (actually 60% for estate between approximately $10 and $20 million).

6. Portability: Portability permits a surviving spouse to use a deceased spouse’s unused exemption amount. Caution! To take advantage of this benefit, an estate tax return must be filed for the deceased spouse. This is a simple concept but tedious to complete. In other words, easier said than done.

7. Grantor Trusts: Plans can be designed that require the grantor to pay income tax on a trust that is not included in their estate upon death. In effect, each year that the Grantor pays taxes for the trust, the trust is growing tax-free for the beneficiaries. Over the long run this is an enormous benefit. Note: President Obama has proposed that this strategy be eliminated.

8. Perpetual Trusts: Many states like New Hampshire provide ways to create a trust that will last as long as the assets survive. In the days of olde, all trusts were required to terminate at a specific time in the future, most often measured by “lives in being.” If this notion intrigues you I encourage you to pick up a copy of Loring and Rounds, A Trustee’s Handbook (2013). No, I do not get paid for the product placement! Note: President Obama has proposed that perpetual trusts be eliminated.

9. Tax Leveraging Trusts: Without getting into a technical explanation, we can still use two year rolling GRATs (Grantor Retained Annuity Trusts – call us if you would like to learn about GRATs). In the right situation these are very powerful wealth transfer tools. Note: President Obama has proposed that a minimum term for GRATs be 10 years which eliminates much of the benefit from them.

10. Predictability: Not because I have run out of things to say but because it’s worth stating twice. OK, if you want something new: we still have the step-up in basis – that’s a huge benefit from a capital gain tax standpoint and from an administrative standpoint.

 

 

New 2013 Gift Tax and Estate Tax Rates – Now What?

cash gift

Congress surprised us again and passed the American Taxpayer Relief Act (don’t you love the catchy name) on January 1 to temporarily avoid the fiscal cliff.

Overall, the new law is much better than the experts expected. It extends the estate tax and gift tax exclusions of 2012 and even indexes them for inflation. In 2013, you can gift $5,250,000 with no gift tax. In 2013, you can die with $5,250,000 with no estate tax. A married couple can double this amount. The tax rate for gifts or estates greater than $5,250,000 rose to 40% from 35%. But so long as your estate is less than $5,250,000, or $10,500,000 for a married couple, there won’t be a tax.

So what does this mean for you?

We will be telling our clients through our newsletter (you can sign up below) that the planning environment is very similar to what it was in 2012.

Consider gifting now.

Real Property. For most people, property values are still low from the long recession. Now is a great time to gift. By gifting now, you will remove assets from your estate at the low value. When the assets appreciate in value again, it will be outside your taxable estate. For example, gift a $1M property now and use only $1M of your gift exclusion. In 10 years, the property may be worth $2M, and it will be outside your taxable estate, and you only burned $1M of your gift exclusion.

Your Business. Gifting now is also a great strategy if you own a business. If you have a business that was hit by the recession, it might be a good time to gift all or some of the business while the value is low. Then the share gifted and all future appreciation will be outside your estate.

Investment Accounts. The same principle holds for investment accounts. If you believe the economy will rebound soon, your stock values may be lower now than in a few years from now. Why not consider gifting now at the low value?

How to Gift and Still Control and Use the Assets?

Ok, so you get the concept of gifting now at low values, but you can’t afford to gift because you need your assets. What can you do? Why not gift assets in a trust to your spouse? This type of gift trust is called a Spousal Lifetime Access Trust (SLAT) or a lifetime bypass or exemption trust.

If you set up a SLAT, your spouse can be the trustee and primary beneficiary. You would then gift assets to the trust for the benefit of your spouse. As trustee, your spouse would have control of the assets, i.e.  your spouse would be able to decide how to invest and when and how much to distribute out. If you have a solid marriage, you would have a say in those decisions and you would benefit from the distributions and growth of the trust assets.

Key Concept. If you have a solid marriage, you have amazing planning opportunities.

Key Concept 2. Jonathan Blatmachr, one of the top veteran estate planning attorneys in the country, likes to advise his clients to use tax deductions sooner rather than later because you never know when Congress will change the rules.

The 2013 American Taxpayer Relief Act has generous estate and gift exclusions. But will the generous exclusions last? We just don’t know. Historically, tax laws change. Favorable rates change to unfavorable rates and so it goes back and forth.

What we do know is that for many, asset values are lower than they will be in the future. Now may be the perfect time to remove assets from your estate to a trust for your spouse. You will continue to indirectly control and benefit from the assets while removing the assets and all future appreciation forever from your taxable estate.

Barron’s on Why You Should Gift Now

Dan Picasso for Barron's

Great article from Barron’s explaining the lifetime bypass trust and how couples can gift over $10,000,000 to each other (although most gift much less) and avoid estate tax if they act by December 31.

For married couples, a popular strategy is for each spouse to create a trust that will ultimately provide for heirs, but that also names the other spouse as a beneficiary. The advantages are clear: Couples can move as much as $10.24 million out of their combined estate, while retaining rights to draw income if they need to. The one hurdle is that the Internal Revenue Service could void your careful planning if you and your spouse create trusts that are too similar. This poses particular problems for procrastinators, since creating the two trusts in rapid succession heightens the risk of raising IRS eyebrows. “The less time you have, the more conservative you need to be about making them very, very different,” says Diana Zeydel, national chair of the trusts and estates department of Greenberg Traurig in Miami.

 

Soros and Buffet Want Higher Estate Tax (video)

Buffett

George Soros and Warren Buffett are asking Congress to drop the estate tax exclusion from $5,120,000 to $2,000,000 and to raise the estate tax from 35% to 45%.

How the Lifetime Bypass Trust Works: Attention CPAs

Cutting taxes

Many of my clients are interested in the Lifetime Bypass Trust. And some are vetting the concept through their CPAs. Here is an email (with the names removed) I have sent to several CPAs to clarify this amazing but simple planning strategy.

The structure we are proposing is a lifetime bypass trust. The concept is the same as used with an A/B trust, or bypass trust.

When a bypass trust is created upon the death of a spouse, it is funded with the deceased spouse’s share of property up to the then death tax exclusion amount. The surviving spouse is usually the trustee and the primary beneficiary of the bypass trust.

The benefits of the bypass trust are:

1) Assets in it (and all future growth) will not be subject to the death tax at the deceased spouse’s death or at the surviving spouse’s death because the trust was funded using the deceased spouse’s death tax exclusion, and

2) Assets in it will be significantly protected from lawsuits and divorce claims against the surviving spouse.

The use of a bypass (A/B) trust is a tried and true estate planning strategy.

The Lifetime Bypass Trust is based on the same principal, except that we are creating and funding it now, to take advantage of the $5.12M gift exclusion available this year, rather than waiting until a spouse dies. One of my client’s calls it an “early bypass trust.”

Just like the at-death bypass trust, the lifetime bypass trust would name spouse as trustee and spouse and children as beneficiaries.

Just like the at-death bypass trust, the assets in the lifetime bypass trust would be exempt from estate tax when the grantor spouse dies, when the surviving spouse dies and, if generation skip exemption is used, even when their children die – two generations of no estate tax on the gifted asset and future appreciation.

Just like the at-death bypass trust , we can give the surviving spouse a limited power of appointment to change the remainder beneficiaries, limited to a certain class of people, like descendants. However, with the lifetime bypass trust, we could also include the grantor spouse as a permissible beneficiary. (Can’t do this with bypass trust created at death b/c the grantor spouse is dead.)

The grantor spouse, after the creation of the trust, can be named a remainder beneficiary if done correctly. This will not cause estate tax inclusion unless there is an implied understanding between grantor and trustee at the time the trust is created.

We recommend drafting the lifetime bypass trust to give an independent third party/trust advisor the authority to add and remove the grantor spouse as beneficiary.

The lifetime bypass trust uses the tried and true principles of a standard at-death bypass trust, but it uses the gift exemption now, while it is $5.12M, rather than at death, when the death tax exclusion is scheduled for a big drop (under current law $1M).

The downside to the lifetime bypass trust is the loss of step up in basis at death. But since the estate tax rate (35%-55%) has historically been a much higher rate than the capital gains tax rate (15%-20%) , most people would rather avoid the estate tax. In addition, the Democrats and the President have expressed their intent to do away with the step up in basis for inherited assets. So losing the step up in basis may happen anyway.

Finally, we may look back and realize 2012 was the best and easiest time in history to reduce or eliminate estate tax. If the estate and gift tax exclusions drop as scheduled on January 1, planning will get much more complicated and much more expensive.

Lifetime Bypass Trust

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Until December 31, the lifetime gift tax exclusion is $5,120,000 per person. Unless Congress acts, this amount will drop to $1,000,000 on January 1, 2013.  It is usually best to use a tax exemption as soon as possible – use it or lose it.

The opportunity, good now through the December 31, is to gift assets out of your estate and forever exempt the assets and all future appreciation from estate tax.

When we explain this to our clients with medium to large estates, they understand the value and urgency of gifting now, but many of them need the assets to live on.  What good is it to give your children your assets when you still need your assets?

Enter the Lifetime Bypass Trust, also known as the spousal lifetime access trust. A lifetime bypass trust is an irrevocable trust that names your spouse as trustee and your spouse and children as beneficiaries. The assets you gift to the trust, and all future appreciation, will be exempt from estate tax.  Until December 31, you can gift up to $5,120,000 to the trust, although many of our clients gift less.

This is the “have your cake and eat it too trust.” The trust assets will be exempt from estate tax when you die, when your spouse dies, and when your children die. In addition, you will retain indirect control and use of the assets because your spouse is the trustee and beneficiary. And if your spouse sets up a similar trust for you, you would have direct control and access to that trust’s assets as trustee and beneficiary, and those assets would also be exempt from estate tax.

Another way to look at it. You gift assets to a trust for your spouse, and your spouse gifts assets to a trust for you. You each control and benefit from each other’s trust, and the assets in each trust will be exempt from estate tax. What a deal!

Just like the A/B trust. You may be familiar with the basic estate tax concept of the A/B trust. When the first spouse dies, a bypass trust (B trust) is funded with the deceased spouse’s share of the estate. By using the deceased spouse’s estate tax exclusion, the assets in the bypass trust are exempt from estate tax. The surviving spouse is typically the trustee and the primary beneficiary. This gives the surviving spouse control and use of the bypass trust assets, yet the assets remain exempt from estate tax.

The lifetime exemption trust uses the same principle as the bypass trust, but instead of creating and funding it at death, it is created and funded now (before December 31) using some or all of each spouse’s lifetime gift exclusion.

Be careful. If each spouse creates a trust for the other, the trusts must be drafted to avoid the reciprocal trust doctrine. If the IRS finds the trusts identical, it will disregard them and pull the assets back into the donor’s estate. To avoid this, we make the trusts different. For example: the trusts could be funded with different assets, the husband could be given a right to income while the wife is given the right to income and principal, the wife could be given a power to name additional beneficiaries and the husband not given that power, or each trust could have different successor trustees or remainder beneficiaries. There are a number of ways the reciprocal trust doctrine can be circumvented based on your unique situation.

Additional benefits. The assets in the lifetime protection trusts would be significantly protected from lawsuits and divorce claims. So in addition to reducing your estate tax liability, you would be gaining significant asset protection.

Deadline looms. The lifetime bypass trust is a terrific tool to reduce or eliminate estate tax. But it must be created and funded before December 31, 2012.

Keep in mind it typically takes about three weeks to establish and fund a lifetime bypass trust. If this strategy appeals to you, you must act now, as time is running out.

Act by Dec. 31 to Avoid Estate Tax (click for slide show)

Year end action plan

We now know the next President and the composition of Congress. Most likely, the historic estate and gift tax exclusions that end on December 31, 2012, will never be seen again. This may be the best opportunity in your lifetime to remove assets from your estate and forever avoid estate tax.

Watch the slide show below to learn more about what you can do in the remaining days of this year to protect your estate.

Annual Gift Tax Exclusion Up to $14k in 2013

Crystal ball

The IRS will increase the annual gift tax exclusion from $13k to $14K in 2013. The annual gift tax exclusion is the amount you and your spouse can each gift to anyone without dipping into your lifetime gift tax exclusion (the lifetime gift tax exclusion is currently $5,120,000 and scheduled to drop to $1M in 2013).  From Forbes:

There is one change taking effect in January 2013 that’s new: the annual gift tax exclusion. The annual gift tax exclusion amount, which is adjusted annually, will be $14,000 for 2013, as announced by IRS last week (it won’t be in hard copy until it hits the Internal Revenue Bulletin 2012-45 on Nov. 5, 2012). That means that taxpayers can make gifts of up to $14,000 per person in 2013 without any federal gift tax consequences (and yes, the per person qualifier means that you can gift up to $14,000 each to one person or a million people without owing a penny in federal gift tax).

As to what else is to come? You tell me… Your guesses?

Gift Now and Avoid Estate Tax

Grim reaper

If you have a net worth of $1M or more (or as a couple, $2M or more), and act now, you could forever remove the threat of estate tax. But if you don’t act by the end of the year, you will miss a historic opportunity.

The 2012 estate tax exclusion and gift tax exclusion are both $5,120,000 – way higher than they have ever been. But unless Congress and the President act, both will crash to $1M on January 1, 2013.

If you die with more than $1M after December 31, 2012, every dollar over $1M will be taxed at 55%. If you die with a $2M estate, your children will get $1,450,000 and the government will get $550,000.

But here’s your big chance: If you gift assets out of your estate before December 31, you can remove up to $5,120,000 (double that for married couples) from your taxable estate.

Don’t think this opportunity is only for rich people. If you have assets that will appreciate – like real estate, business interests, or other investments, you should take advantage of this historic opportunity to remove assets and all future appreciation from your taxable estate.

I know what you are thinking – ok, I get it, I should remove assets from my estate to avoid a future estate tax, but I need those assets. Can I gift them, but still benefit from them? The answer is YES.

A lifetime exemption trust, sometimes called a spousal lifetime access trust, can remove the asset from your estate and give you indirect access to the income. Here’s how it works:
* Create an irrevocable trust which names your spouse and children as beneficiaries.
* Your spouse can be the trustee and direct the investments and distributions.
* Transfer assets to it before the end of the year.
* Your spouse, as trustee, can distribute income from the trust to herself and deposit it in your joint account – which means you will have access to the trust income, even though you gifted away the assets.

Your spouse can also create a lifetime exemption trust which names you and your children as beneficiaries. However, this second trust must be drafted very carefully with different provisions than the first one to avoid the reciprocal trust doctrine. If the IRS determines the two trusts are identical, it will pull the gifted assets back into your estate.

This is just one of many gifting strategies available.

If you would like to leverage this historic gifting opportunity, you need to act now. Planning will most likely take a several weeks and time is running out.