Gift Tax Exemption Set to Expire at Year End: Here’s What To Do

‘Tis better to give than receive, goes the saying, though when the gift involves a tax-free transfer of more than $5 million, receiving isn’t too bad either.

Thanks to current exemptions, today you can avoid substantial gift tax on wealth transferred to family and friends. But there’s a catch: the $5.12 million exemption is scheduled to revert to $1 million on January 1, 2013. You’ll have to act quickly. 

Spousal lifetime access trusts:

One way to take advantage of the current tax rules is to establish a “spousal lifetime access trust.” From law firm Cole Schotz: 

“Under such a trust, a husband and a wife can each gift assets into a trust for the other and your children, that can be accessed by the other (since they will be the sole trustee) for the health, education, maintenance or support of any of these beneficiaries.  There are technical provisions these trusts should include to avoid any potential estate tax problems associated with the “reciprocal trust doctrine”.  If done properly, each spouse could gift $5 million into a trust for the other, together utilizing the $10 million of exemptions.” 

This strategy works best for couples with more than $15 million in assets. Akerman Senterfitt: 

“Because this strategy could potentially control access to $10 million of assets, it probably is best utilized by clients who have at least $15 million in assets… That way, the balance of assets can be retained in a way that allows complete access. Alternatively, married clients can consider having only one spouse create such a trust for the benefit of the other spouse. That would tie up a maximum of $5 million of assets in an irrevocable trust while retaining total discretion over the balance of their assets. This alternative might make this strategy attractive to clients with even less than $15 million in total assets.” 

Other vehicles for taking advantage of the exemption while transferring wealth include:

Intra-family loans:

“By making a loan, you can provide a family member or family trust with funds at a low interest rate. The minimum interest rate that you can charge without having the foregone interest be considered a gift is published monthly by the Federal government. For July, the minimum annual interest rate applicable to an intra-family loan with a nine year term is 0.92%, which is at a historical low.” (Patterson Belknap)

Intentionally defective grantor trusts:

“Many of our clients are using their exemptions to shift interests in closely held businesses, family investment companies or other assets to future generations of beneficiaries. These gifts are often structured using ‘intentionally defective grantor trusts’ (IDGTs). An IDGT is an irrevocable trust that a grantor establishes for the benefit of others, e.g., children and grandchildren, retaining no beneficial interest in the trust property and thereby removing the entire value of the property (including appreciation) from the grantor’s estate.” (Morrison & Foerster)

Generation-skipping tax exempt trusts:

“Under a GST exempt trust, the trust assets may be insulated further from estate and gift taxes in the future by making sure that the provisions of the trust do not cause the trust assets to be included in the beneficiaries’ estates for estate tax purposes. Married couples may double the amounts contributed by using both spouses’ GST exemptions.” (Partridge Snow & Hahn)

Family limited partnerships: 

“A properly structured and operated family limited partnership (FLP) can be an effective vehicle for transferring assets such as a business, real estate or marketable securities. You contribute assets to the FLP, retaining a small general partnership interest and transferring limited partnership interests to your beneficiaries.” (Adler Pollock & Sheehan)

Qualified personal residence trusts:

“In the case of a personal residence, a gift tax can be leveraged so that more than the reduced gift tax value can be removed from the estate. This can be accomplished through an approved technique known as a Qualified Personal Residence Trust (QPRT) in which the residence is placed in trust for a designated period of years. During the designated period, the donor reserves the right to continue to live in the residence.” (Fox Rothschild)

Grantor trusts:

“To facilitate the protection and growth of the assets gifted, we advise clients to make substantial gifts to a trust or multiple trusts. The trust can be drafted for the benefit of the donor’s intended beneficiaries (e.g. children and/or grandchildren) and the donor can appoint trustees that will have the power to make distributions to or for such beneficiaries according to a standard based on the beneficiaries’ needs and the donor’s wishes. The trust can be structured as a ‘Grantor Trust’ for income tax purposes.” (Ruskin Moscou Faltischek)

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Read the updates:

• Gifting to a Spousal Lifetime Access Trust (Cole Schotz) 

• Gift Tax Exemption May Be Lower in 2013: Plan Now For Future Protection (Akerman Senterfitt) 

• Estate Planning Opportunities Set to Expire in Six Months (Patterson Belknap Webb & Tyler LLP) 

• Gift Tax Planning Opportunities: The Window is Closing (Morrison & Foerster LLP) 

• Skip the Taxes With a GST Exempt Trust (Partridge Snow & Hahn LLP) 

• Insight on Estate Planning - June/July 2012 (Adler Pollock & Sheehan P.C.) 

• $5.12 Million Gift Giving Window Of Opportunity: 6 Months And Counting! (Fox Rothschild) 

• Trusts & Estates Law Alert — June 2012 (Ruskin Moscou Faltischek) 

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Related reading:

• Time Running Short to Take Advantage of Current Gift Tax and GST Tax Exemptions (Trenam Kemker) 

• 2012—The Last Chance for Effective Estate Planning? (Davis Wright Tremaine LLP) 

• Window Closing on $5.12M Gift Tax Exclusion and Other Important Tax Benefits (Miller & Martin PLLC) 

• Two Estate Planning Opportunities To Think About Now and Act On Before Late Fall (Saul Ewing LLP) 

• Elder Law And 2012 Gift Tax Laws (Adler Pollock & Sheehan P.C.) 

• Wealth Management Update - June 2012 (Proskauer Rose LLP) 

• Advanced Estate Planning Creates Opportunity (InKnowVision) 

• Reacting is Not Planning! (Niles, Barton & Wilmer, LLP) 

• Wealth Transfer: 7 Ways to Maximize the Value of Your Gift 

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