Estate Planning for the New Year

Happy New Year

The end of the year and the start of a new one is the traditional time for retrospectives and predictions. In the estate world, the dominate theme in 2011 was the extraordinary asset transfer opportunities available to the wealthy. Specifically, the right to give $5 million ($10 million for a married couple) to children or other beneficiaries in a Dynasty Trust and thereby avoid estate tax on those assets and their appreciation forever. Using a Dynasty Trust also provides asset protection advantages so that the transferred assets remain in the bloodline in perpetuity.

These transfers also could be discounted for transfer tax purposes, so that the transferred assets are worth only 60% to 70% of their underlying value. The gifts could be leveraged to allow for even greater asset transfers, through techniques that benefit from low interest rates, such as GRATs or a "gift and sale to an Intentionally Defective Trust." (See the prior December 6, 2010 Post, where a number of articles about these techniques are cited.)

In short, the stagnant economy, low interest rates, and advantageous gift and estate tax laws, combined for a banner year for wealthy taxpayers doing estate planning.

Will this optimal estate planning environment continue in 2012? Most everyone expects the dismal economy and low interests rates to continue. The $5 million exemption amount also is scheduled to remain during 2012. However, there is a remote possibility that tax legislation later in 2012 could retroactively reduce the exemption amount for all of 2012 (emphasis on "remote"). Thus, it is likely that, until 2013 when the exemption amount falls to $1 million, the $5 million exemption remains.

In the Obama administration and Congress' sights for 2012, however, is legislation to eliminate discounts on intra-family transfers; limiting Dynasty Trusts to only 90 years; and eliminating some of the advantageous transfer strategies, such as 2-year GRATs.

On balance, 2012 starts with the same advantages that applied in 2011. So those who wanted to act but failed to do so still have the opportunity to transfer significant assets estate and gift tax-free, at least early in 2012 and perhaps up to December 31, 2012. Not all asset transfer strategies, however, may survive the entire year.

Read more discussion of estate planning topics affecting Virginia residents and U.S. citizens at Dedon on Estate Planning.

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