In 2011 and 2012, lawyers were advising clients about tax and estate planning opportunities to transfer up to $5 million tax-free. However, Congress passed the American Taxpayer Relief Act of 2012 (ATRA) at the beginning of 2013, making the planning efforts unnecessary in many cases. ATRA maintains the $5 million exclusion amount and other important provisions from a previous law. It also allows for the deduction of state death taxes and extends the time to pay estate tax for certain businesses. This means that clients and their attorneys need to review their 2012 planning and consider new opportunities for tax and estate planning. ATRA made a technical correction to the portability provisions of TRA 2010, providing more certainty in transfer tax law. This fixed a mistake in how the exclusion amount for a deceased spouse is calculated. Before ATRA, previous laws had expiration dates, making it hard to plan for the future. EGTRRA increased the exclusion amount over the years and eventually repealed the estate tax in 2010. TRA 2010 provided an election for estates of people who died in 2010 to choose between a new estate tax regime and a carryover basis regime, with a $5 million exclusion amount and a 35% rate. ATRA provided relief by fixing the technical correction and providing more certainty in the law. In 2010, TRA made changes to estate and gift tax laws, including a $5 million exclusion amount and portability between spouses, but these changes were set to expire at the end of 2012. Thankfully, ATRA made these changes permanent, giving relief to clients and practitioners. ATRA also simplified GST tax laws and included provisions to help fix past mistakes. If you made a mistake with a tax election for your trust, you can ask the IRS for more time or leniency. You should look at your past tax returns and trusts to see if you need to fix anything. If you do, you can ask the IRS for help in a letter. In ATRA, some important changes were made to the tax system, but some proposals were left out. The Obama Administration had wanted to make more changes, like limiting valuation discounts and making changes to grantor-retained annuity trusts (GRATs). Now that the transfer tax system is more certain, many practitioners need to focus on finalizing transactions from 2012. Clients who made gifts over $5.12 million might owe gift tax, due on April 15, 2013, and they should get their assets appraised if they were hard to value. Gifts made using “defined value” or “formula” clauses could also complicate tax reporting. Clients who planned to split gifts with their spouse must elect to do so on their gift tax returns. In 2012, many people used a special way to give gifts worth exactly $5.12 million. They did this to avoid problems with getting appraisals on time. They used a method called “defined value” or “formula” clauses to give their interests in companies. After the IRS won a court case, it became more important to do this correctly. First, they needed to get the right appraisals. Then, they had to update the company’s records to show the gifts. They also had to make it clear that the gifts were based on the appraisals, not the final value for taxes. It’s important to keep good records when transferring ownership in a business, like a partnership or corporation, especially when it comes to taxes. The business needs to report the transfer by a certain deadline, and the trustees of any trusts involved also have to make sure everything is done correctly. This helps protect everyone involved and makes sure the taxes are paid correctly. It’s also important to report the transfer on the gift tax return, so that the deadline for any audits or legal issues can start. If the transfer involved selling part of the business, that also needs to be reported on the tax return. If you or your family set up a trust in a hurry at the end of 2012, you might want to change some of the rules in the trust. You can do this by using a “remove and replace” power or by using a process called trust decanting. Trust decanting allows the trustee to change the terms of the trust, within certain limits. If the trust doesn’t allow for trust decanting, you might be able to change the governing law of the trust to a more favorable jurisdiction. There are also state laws that allow for modification or reformation of trusts.
If you or your family put assets with a low basis into an irrevocable trust, you might want to think about the tax consequences for the beneficiaries when they inherit the assets. You can consider two possible solutions for this issue. If a trust has a “swap power,” the client can exchange low-value assets in the trust for high-value assets without owing gift taxes. This needs to be done carefully to avoid being seen as a gift. If the trust doesn’t have a “swap power,” the client can still buy assets from the trust using a promissory note. This allows the client to benefit from the assets while still reducing their taxable estate. The note can be structured to allow for future growth of the assets outside of the client’s estate. Some people used up their tax exemption in 2011 and 2012 when giving gifts. Now, they might have a problem if they want to keep giving gifts without paying extra taxes. But there might be some relief if the gift amount goes up due to inflation. This could help some people keep their gifts tax-free. If the extra exemption from inflation isn’t enough, there are options to preserve the tax-exempt status of a trust. One option is to have the life insurance policy owned by the same trust that received the gift in 2012, so the income from the gift can be used to pay the premiums. If the trust wasn’t set up this way initially, it can be merged with the gifting trust, or both trusts can be combined into a new one. Another option is for the old trust to sell the policy to the new trust, but it’s important that the new trust is treated as owned by the insured. Another option is to lend money to the trust so it can pay the premiums. It’s important to be aware of the rules when lending money to a life insurance trust. Additionally, if gifting results in a mix of taxable and non-taxable assets, they can be separated. A qualified severance is when a trust is divided into two or more separate trusts to make sure they follow the rules for taxes. This can help people who want to give a lot of money as a gift but are worried about the tax consequences. After 2012, there are still ways for people to plan and give gifts without having to pay too much in taxes. These are three different techniques that wealthy people use to avoid paying a lot of taxes on their assets. The first technique involves selling assets to a trust at a discounted rate, the second involves loaning assets to family members or trusts at a low interest rate, and the third involves setting up a special kind of trust that pays the creator an annual income for a certain period of time. These techniques are still popular and effective, especially with today’s low interest rates. In 2012, a new law called the American Taxpayer Relief Act was passed, changing the rules for estate and gift taxes. Even if you’ve already given away a lot of money, there are still ways to reduce your taxes in 2013 and beyond. One option is to set up a trust that gives money to charity for a certain number of years, and then the rest goes to your family without any taxes. Another idea is to put your house into a trust for a certain number of years, and then give it to your family with fewer taxes. It’s important to work with a lawyer to make sure everything is done correctly.
Source: https://www.floridabar.org/the-florida-bar-journal/its-2013-now-what/
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