Estate Planning: The Clock is Ticking Use it or Lose it Before 2013

In 2010, President Obama signed a law that changed the estate, gift, and generation-skipping transfer (GST) tax rates and exemptions. These changes will end in 2012, and if new laws aren’t passed, the old tax rates and exemptions will come back in 2013. This means that people should consider using the new tax laws to reduce their taxable estate before they expire. With the increase in the gift tax exemption from $1 million to $5 million per person, clients can give up to $5 million to their descendants or others without paying gift tax. Married couples can give up to $10 million. This can help reduce their estates and any future taxes. Clients should also consider forgiving loans made to their descendants using their gift tax exemptions. By making gifts during life, clients can remove future appreciation and income from their estates. This can be a good option for clients who don’t need or plan to use such income. For example, if a client gives $5 million this year, the value of that gift could grow to over $13 million to over $54 million in 25 years. Additionally, the gifted property’s income would be removed from the client’s estate over the 25-year period. It’s better to give gifts in a trust instead of directly to someone because it provides tax benefits and protects the money from the beneficiaries’ creditors. You can also give interests in a company or partnership to maximize the tax benefits. If a married client wants to give some of their business interests to their kids, they can use a special rule to lower the value of the gift for tax purposes. This means they can give away $14 million worth of the business and still not have to pay gift tax. The tax rate for big gifts is going up next year, so it’s a good idea to give big gifts this year if you can. For example, if someone gives away $5 million next year, they’ll have to pay more tax than if they give it away this year. But if they wait until next year, they could end up paying even more tax if the business grows in value. If someone doesn’t want to give anything away right now, they can still set up a special account to protect their money from taxes. That way, they can keep control of the money and it won’t be taxed as much when they give it away later. By creating nonreciprocal trusts, spouses can protect their assets and potentially reduce estate taxes. For single individuals, a Delaware Asset Protection Trust (DAPT) can achieve similar results by removing assets from their estate and protecting them from creditors. Both the trusts and the DAPT can also be used to set up a trust to purchase life insurance without the grantor being a beneficiary or trustee. You can give real estate to a trust for your family and not pay any taxes on it, as long as you pay the taxes on the property. If you want to keep living in the property, you can pay rent to the trust, which also won’t be taxed. This is a good way to pass on property to your kids and grandkids without them having to pay taxes on it. A qualified personal residence trust (QPRT) is a way for people to give away their home while they are still alive, but still live in it for a certain amount of time. After that time is up, the home goes to their family without any extra taxes. The person can also keep living in the home if they pay rent to their family, but it won’t be taxed. When the QPRT is first created, the person gives away the value of the home minus the value of the time they get to keep living in it. With the recent increase in the gift tax exemption, older people can make shorter term QPRTs and still avoid extra taxes on the gift. If you have a life insurance policy, the money from it might be taxed when you die. But if you create a trust and put the policy in it, the money can go to your beneficiaries without being taxed. It’s a good way to plan for the future. If you don’t have many people to leave the money to, you can use the increased gift tax exemption to put more money in the trust to pay for the insurance. It’s also a good idea to have life insurance to help with potential taxes when you die. If you already have a trust, you might want to think about getting more insurance or keeping the policies you have. An intentionally defective grantor trust (IDGT) is a trust that helps to reduce estate taxes. One way to fund the trust is by selling property to it for a discounted value and freezing the value at the time of the sale. This means that any future appreciation in the property goes to the trust beneficiaries and is not subject to estate tax. To start the trust, a married couple can make a tax-free gift of up to $10 million. This money allows the trust to buy more assets (up to $100 million) without any gift tax. Under the old law, the limit was only $20 million. A sale to an irrevocable trust is a good way to reduce taxes and transfer assets to family members. The trust pays interest to the client, but it doesn’t count as income for tax purposes. This means the client doesn’t have to pay taxes on the sale or the interest payments. This sale also helps “freeze” the value of the assets, so any increase in value goes to the trust instead of the client’s estate. However, recent changes to the law might make it harder to get these benefits, so it’s important to act quickly if you’re thinking about making this kind of sale. The government might reduce the amount of money you can give away tax-free after you die. But don’t worry, even if they do, you’ll still come out ahead. Right now, the law lets you give away up to $5 million tax-free, but that might change in 2013. So if you have a lot of money, it’s a good idea to take advantage of the current law and give some of it away now to avoid paying high taxes later. Stay tuned for changes to estate, gift, and GST tax laws after the November elections. Clients may have more gift tax exemptions available, and there are factors to consider when determining if a loan will be respected as such. The gift tax paid will be removed from a client’s estate if they survive for three years after the gift. It’s important to consider insurance when creating a Qualified Personal Residence Trust (QPRT) to protect against premature death. It’s also possible to get discounts on property interests for estate tax purposes. If you give a gift to a trust, it’s usually not considered a present interest in the property because the beneficiaries won’t get the money right away. But if the trust allows the beneficiaries to withdraw some of the money and they are told about this, it can be considered a present interest and not be subject to gift tax. This is called a “Crummey” power. If a gift is made to a trust for multiple beneficiaries with “Crummey” powers, it can qualify for the annual gift tax exclusion. This is all part of estate tax planning, which can get pretty complicated. David Pratt is a partner at a law firm and knows a lot about this stuff. Lindsay A. Roshkind and Scott L. Goldberger are lawyers who specialize in estate planning and taxes at a law firm in Boca Raton. They both have advanced degrees in law and taxation from top universities. They are part of the Tax Section and are dedicated to serving the public and improving the legal system.

Source: https://www.floridabar.org/the-florida-bar-journal/estate-planning-the-clock-is-ticking-use-it-or-lose-it-before-2013/