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Running Out of Time for 2012 Estate Planning Opportunities
Thursday, October 4, 2012

With significant tax increases scheduled for Jan. 1, 2013, time is running out to take advantage of unprecedented opportunities to transfer assets to your family in 2012. Under current tax law, a U.S. citizen may give anyone up to $5.12 million (the “Current Exemption”) during 2012 without paying any federal gift taxes. Any gifts made before year-end greater than the Current Exemption would be taxed at a flat 35 percent federal gift tax rate. Unless Congress agrees to extend the Current Exemption, the federal tax on gifts will increase up to 55 percent on lifetime gifts over $1 million. Those interested in taking advantage of the current tax laws are encouraged to consult with their advisers about planning opportunities as soon as possible.

2012 Lifetime Transfers to Your Family

Transfers of property to trusts for the benefit of a spouse, children and grandchildren during 2012 may yield significant overall savings for your family.

Each person may gift up to $5.12 million of unused exemption during 2012 before triggering a federal gift tax. A married couple can act to transfer up to $10.24 million of unused exemption during 2012 without triggering any federal gift tax. However, the same gift on Jan. 1, 2013 would be taxed at rates of up to 55 percent on the amount over $2 million (or $1 million if the gifts are not “split” by a married couple).

Those interested in making large gifts before year-end should discuss with their tax advisers how to structure the proposed gift to best meet the needs of the donor and donee, in addition to the potential tax savings.

2012 Lifetime Transfers to Dynasty Trusts

Transfers of property to irrevocable “dynasty trusts” with a potentially unlimited term can build and preserve wealth for generations of family members by shielding trust assets from estate and generation-skipping taxes, as well as certain creditors.

Each person who makes a gift of up to $5.12 million (less certain other lifetime gifts) during 2012 can allocate exemption from the generation-skipping transfer tax to a “dynasty trust.” Such gifts could include each spouse creating a dynasty trust with different terms for the other spouse.

These dynasty trusts can avoid not only current gift taxes but also future transfer tax consequences when trust assets are distributed to the donor’s grandchildren (or upon the death of the donor’s children). Those able to transfer assets with appreciation potential can accumulate significant assets for future generations and secure substantial savings on future estate and gift taxes.

2012 Transfers of Closely Held Business Interests

With historically low interest rates and generally depressed business conditions, many closely held businesses can support lower valuations than in more normal economic times. When combined with other transfer techniques, families can transfer interests in closely held businesses to the next generation at substantially reduced transfer tax values.

Transfers to Grantor Retained Annuity Trusts

Not everyone can make significant gifts before year end. A person who may need to use gifted assets in the future or has already used his or her exemption can create a grantor retained annuity trust (“GRAT”) that pays its creator annual payments as an annuity over a fixed trust term.

Current law allows the GRAT to be formed with no taxable gift, so that the fair market value of the property transferred to the GRAT equals the present value of the annuity returned to its creator based upon the applicable IRS assumed interest rate (1.2 percent for transfers to GRATs during October 2012). If the GRAT assets outperform the 1.2 percent IRS interest rate, the GRAT will have assets remaining after paying the annuity, which would pass at the end of the trust term transfer tax-free to whomever the grantor has selected.

The usefulness of GRATs will continue in 2013, as long as interest rates remain low and Congress does not adopt proposals to diminish the usefulness of this technique. For example, some proposals have sought to impose a minimum 10-year term or require a taxable gift upon creation of the GRAT.

Improving Existing Planning

A current gift isn’t necessarily required to take advantage of the Current Exemption. In certain circumstances, individuals can take advantage of the increased exemption amount available during 2012 by making existing trusts more tax-efficient. For example, it may be possible to allocate exemption from the generation-skipping transfer tax to existing trusts that would be subject to tax when assets pass to the grantor’s grandchildren. Another planning option may be to forgive debts owed to you by children or family trusts.

A careful review of your estate plan may identify other opportunities to apply the current tax law in ways that were not previously available but that may no longer exist after year-end.

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