As we have emphasized over the last two years, the Estate Tax Exemption Amount and the Lifetime Gift Exemption Amount currently at $5.0 million per person will end December 31st, 2012, and revert to $1.0 million.
President Obama has already indicated in his Green Book for the 2013 Budget that the Lifetime Gift Exemption will remain at $1.0 million and the tax rate will be 55% for transfers above that $1.0 million amount.
The opportunity, therefore, to transfer assets into a protected trust before year-end while retaining flexibility is unprecedented. The additional benefit is that the future appreciation of the assets will be sheltered from both federal and state estate tax.
When considering transfers of greater than $1.0MM in real estate, securities, partnership interests, or other assets, we strongly advise that a properly structured trust is the ideal recipient.
Given the potential value of the trust, it is specifically designed so that you and your spouse are able to enjoy a measure of flexibility to continue to access and control the transferred assets. Among other things, this is accomplished by:
- Retaining the power to remove and appoint Trustees or to receive loans from the trust;
- Granting your spouse the right to receive distributions and serve as Trustee; and
- Authorizing your spouse to determine how assets will be divided between your children.
Additionally, through the trust’s provisions, the assets receive an exceptional degree of protection against financial reversals and liability that you, your spouse, your children, and your other descendants may encounter during your lifetimes.
Again, after the expiration of the $5.0MM exemption at the end of 2012, only an act of Congress may increase the exemption from its $1.0MM level. While it is unknown how Congress may respond after the election, the exemption is still likely to substantially decrease due to the current economic and political climate.
The nation is facing a “fiscal cliff” – the coinciding action of tax increases and spending cuts in order to remedy escalating budget deficits. The result is that this special $5.0MM planning opportunity may never resurface during our lifetimes and be forever lost.
The prospective constraints on the present amount gifted will exponentially diminish the future amount that may be exempt from estate tax. This concern is compounded by the fact that certain assets may currently be undervalued due to current market conditions and may reasonably be expected to experience accelerated growth in the coming years and decades in the protected trust.
To highlight the long-term estate tax advantage of making a significant lifetime transfer to a trust, consider an example in which a $3.0MM gift is made, both spouses pass away in year 2032, the gift appreciates at a very modest 4% per annum, and President Obama’s proposed estate tax plan is adopted. The value of the assets will have doubled.
The consequences of failing to make such transfer now are at least $650,000.00 in state estate taxes and $2,600,000.00 in federal estate taxes, reducing the amount received by the children by more than 50%. Naturally, this negative effect is diminished if more assets are gifted away, if each spouse lives longer, or if the estate appreciates in value at a greater rate.
The firm will close for the year on December 15; therefore, to be effective, all work must be commenced and completed within the month of November. We invite you to call or e-mail our office to review your specific circumstances.