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R. Schoenhaar, Esq.*
We are half way
through 2012 and the generous tax legislation that went into effect on January
1, 2011, is scheduled to sunset on December 31, 2012, if Congress fails to act.
Those who can participate in significant gift planning must act now if they
plan to take advantage of the historic opportunities presented by the high gift
tax exemption amount before the close of 2012.
What's At Risk?
Congress does nothing, which is highly likely given its failure to act in 2009
and the fact that this is an election year, the estate, gift, and generation-skipping
transfer (GST) taxes will revert to pre-2001 levels as follows:
For the optimist who believes
Congress will act, experts predict that any new legislation will be much less
favorable than the rates and exemption amounts that exist today for gifting. Even
if the experts are wrong and Congress extends the current tax laws, gifting now
can still be an advantage if assets appreciate in value. Most of the pundits
are saying if Congress acts:
whether Congress acts or allows the current tax laws to sunset, there is a significant
risk to failing to take advantage of the current historic gifting opportunities.
What to Do?
It is critical
to consult with your legal and tax advisors to analyze your specific situation
(i.e. amount of assets available,
cost basis, gift tolerance, etc.). High net worth individuals who decide to make
significant gifts can do so utilizing a variety of strategies.
The most simple
gift transaction is to make outright gifts. However, this is suitable only in
specific situations as it is not an effective method for gifting to young
children or grandchildren, can expose the asset to the donee's creditors, and
does not allow the donor to leverage his or her GST exemption.
the protection and growth of the assets gifted, we advise clients to make substantial
gifts to a trust or multiple trusts. The trust can be drafted for the benefit
of the donor's intended beneficiaries (e.g.
children and/or grandchildren) and the donor can appoint trustees that will
have the power to make distributions to or for such beneficiaries according to
a standard based on the beneficiaries' needs and the donor's wishes.
The trust can be
structured as a "Grantor Trust" for income tax purposes. This means that the
income tax liability of the trust will flow through to the donor's personal
income tax return. This presents the following additional benefits: (i) trust
assets appreciate free of income tax liability, (ii) the donor effectively makes
additional tax free transfers to the trust by paying the income tax on the
trust's income, and (iii) transactions between the donor and the trust are not
considered a taxable event for income tax purposes.
In addition to
making gifts to a Grantor Trust to utilize the donor's gift tax exemption
amount, assets can be sold to a trust through a sophisticated technique
referred to as a Sale to an Intentionally Defective Grantor Trust. In a sale
transaction, the donor can sell additional assets (valued after discounts if
available) to a Grantor Trust in return for a secured promissory note with
interest only payments until maturity. The interest rate used for a nine (9)
year note is the Mid-Term AFR rate which is presently 1.07%. The note can
provide the flexibility for pre-payments if the donor so desires. Finally, the
donor can allocate his or her unused GST exemption to the "seed" gifts made to
the trust, valued at approximately 10% of the value of the sale transaction, and
the entire trust will grow and pass to the donor's children and grandchildren
without incurring an estate or GST tax.
the historic gift tax opportunities that exist today, it is critical that gifts
be made before these opportunities expire at the end of this year. The wealth
transfer strategies discussed above are just a few strategies available for significant
estate and gift tax planning. Do not wait, start the process of implementing a
wealth transfer program that is coordinated with your overall estate plan now.
*David R. Schoenhaar, Esq., is a senior associate at
Ruskin Moscou Faltischek, P.C. and is a member of the firm's Trust and Estates
Planning and Litigation Department.
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