Gift Tax Exemption in 2012 - 5 Ways to Benefit Without Giving It All Away…

The current gift tax exclusion is scheduled to expire at midnight on December 31, 2012, bringing to an end the highest exemptions the country has ever seen. Unless Congress acts soon (and in the current political climate that seems unlikely), the $5 million exemption will revert to $1 million, and any amounts gifted that exceed $1 million will be taxed at the rate of 55%.

But not everyone is in a position to give away their assets – whether $5,000,000 or $50,000 – before the end of year. Fortunately, there are options that will let you take advantage of the exemptions without having to give it all away. Here are five: 

1. Buy or transfer a life insurance policy:

“If your irrevocable trust purchases a life insurance policy, the life insurance proceeds will be distributed to the named beneficiaries estate-tax free upon your death.  On the other hand, if you purchase a life insurance policy and hold it yourself as the ‘owner’, the proceeds will be part of your estate and subject to estate tax at up to the maximum tax rate (which is scheduled to revert to 55% in 2013).” (Janet Brewer) 

2. Sell or loan assets to a trust

“If giving away a significant amount of wealth makes you uneasy, but you still wish to take advantage of current gifting opportunities, you may consider selling property or loaning funds to a trust for the benefit of your family members. As long as the transferred asset appreciates more than the interest rate you charge, you will have removed the future appreciation from your taxable estate while maintaining the current value of the asset for yourself. For this reason, this approach is often called an ‘estate freeze’ technique.” (Mintz Levin) 

3. Create a trust that pays you dividends:

“In a [grantor retained annuity trusts (GRAT)], the donor transfers assets to a trust and retains the right to receive an annual payment from the trust for a period of years. If the assets in the GRAT appreciate at a rate greater than the so-called hurdle rate, the excess appreciation will pass to the donor’s beneficiaries free of gift tax when the trust terminates.” (Patterson Belknap) 

4. Start transferring your home:

“Qualified Personal Residence Trusts are a perfect way to transfer your primary home or vacation home to your children over time.  As a result of depressed real estate prices, now is an opportune time to gift a residence.” (Farella Braun + Martel) 

5. Forgive a family loan:

“If you have loaned money in previous years to family members, this is a good time to turn that loan into a tax-exempt gift. However, taxpayers who choose this tactic should be careful; the IRS has imposed taxes on forgiven loans in cases where there was no paper trail to show that those “loans” were not actually gifts at the time they were made. To create a paper trail where none currently exists, you might pursue this solution (with the help of a tax professional): Loan your family members the money needed to pay off the old loan, properly document the new loan, and then forgive it.” (Ronald Adams) 

—- 

Read the updates:

• Update: Estate and Gift Tax Laws for the Rest of 2012 - Janet Brewer 

• The Time Is Now: Gift Planning Opportunities Will Expire at Year End - Mintz Levin 

• The Opportunity to Take Advantage of Favorable Tax Laws is Expiring - Farella Braun + Martel LLP 

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

• Now or Never? Take Advantage of Gift Tax Exemption Limits - Ronald Adams 

—- 

Find additional estate planning updates on JD Supra»