Making Rare Gifting Opportunities Work for You in 2012March 2012
Today’s powerful combination of high transfer tax exemptions, low tax and interest rates and deflated property valuations offers unprecedented opportunities to reduce wealth transfer taxes. But this window of opportunity could easily close by the end of 2012. Unless Congress acts, many of today’s favorable transfer tax laws are scheduled to expire on January 1, 2013. Moreover, the Obama administration’s 2013 budget also calls for a reduction in exemptions and an increase in tax rates.
Below are strategies that take advantage of today’s favorable wealth transfer climate, and some important planning ideas designed to prepare your estate for the uncertainties of 2013.
MAXIMIZE THE USE OF YOUR LIFETIME GIFT AND GST TAX EXEMPTIONS
• Reduces the amount of your estate that may be subject to estate tax.
• Future appreciation of the gift is removed from your estate.
Why Now? This year’s transfer tax laws are generous by historical standards, because the lifetime gift and GST tax exemptions are both $5.12 million. Next year, this exemption is scheduled to drop to only $1 million. Since next year’s top federal estate tax rate is scheduled to increase from 35% to 55%, taking advantage of this exemption today can translate into meaningful estate tax savings.
Consider this Strategy: This year’s 15% maximum federal long-term capital gains tax is scheduled to climb to 20% next year, and the maximum federal income tax rate is scheduled to increase from 35% to 39.6%. In addition, in 2013 investment income will be subject to the new 3.8% Medicare tax for single individuals with annual income greater than $200,000 or for married couples filing jointly with annual income above $250,000. While you shouldn’t sell investments or opt to take income solely for tax purposes, consider selling appreciated assets this year or accelerating income or taking IRA distributions into 2012. You could use the cash to fund gifts, benefiting from this year’s favorable maximum lifetime gift exemption.
USE YOUR ANNUAL GIFT TAX EXCLUSION TO TRANSFER ASSETS EARLY THIS YEAR
• Allows you to maximize your gifts without reducing your lifetime gift exemption.
Why Now? Gifting early in the year removes any potential appreciation from your tax liability.
Consider this Strategy: Want to guide how these gifts are ultimately used? Consider using your annual exclusion to open 529 College Savings Plans for your grandchildren or children. In fact, current tax laws allow you to front load these plans by using five years of annual exclusion gifts in 2012, thereby contributing $65,000 to each grandchild’s plan, or $130,000 for a married couple.
TRANSFER ASSETS YOU BELIEVE WILL APPRECIATE INTO A GRAT OR CLAT
• Removes potential asset appreciation out of your estate gift tax free.
Why Now? The IRS hurdle rate for GRATs and CLATs is at an all-time low of only 1.4%. Rising interest rates will diminish tax savings GRATs and CLATs provide. GRATs may also be a timely opportunity because Congress may propose significantly longer GRAT terms, increasing the possibility that you could pass away during the GRAT’s term. President Obama has also previously proposed longer GRAT terms and his current budget proposal calls for a 10-year minimum GRAT term.
Consider this Strategy: If a GRAT appreciates to the greatest extent that you feel will occur during the trust term, you may substitute the GRAT’s appreciated assets with cash and lock in the gain for your beneficiaries.
CONSIDER TRANSFERRING YOUR RESIDENCE INTO
A QUALIFIED PERSONAL RESIDENCE TRUST (“QPRT”)
• Transfers the value of the residence, including any future appreciation, out of your estate.
• Leverages this year’s $5.12 million lifetime gift tax exemption.
• Leverages today’s reduced real estate valuations.
Why Now? Today’s lower real estate values could make QPRTs especially attractive, since future appreciation is removed from your estate.
Consider this Strategy: A recent Tax Court case allowed a “lack of marketability” discount to spouses for their undivided interest. For example, a $5 million residence may be split between a husband and wife, in two separate $2.5 million QPRTs. Since a split residence is usually considered less marketable, a discounted value is allowed for gift tax valuation purposes.
Consider acting now because a thoughtful wealth transfer strategy deserves some time and planning. While 2013 may seem far away, the outcome of the 2012 election could generate last-minute tax law changes. The wise person will get ahead of this scramble and act sooner rather than later.
We are always here to help. Call your Fiduciary Trust representative, or take this opportunity to contact your estate planner.
This communication is intended to provide general information. The information and opinions stated herein are as of February 2012, unless otherwise indicated, and do not represent a complete analysis of every material fact. We undertake no obligation to update this information. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual tax or investment advice or as a recommendation of any particular security, strategy or investment project. Please consult your personal advisor to determine whether this information may be appropriate for you. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.
Managing Director and
Director of Trust Administration
Managing Director and
Managing Director and
Director of Tax Services
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