Jensen Law Office, PLLC

The following was first posted on the "Surviving the Estate Tax Fiscal Cliff" on November 18th, 2012:

Recent news articles have made the point that it President Obama may actually be in a better position, politically, if he does not agree to extend the tax provisions of the current code before the end of the year. Publicly the President and Congressional leaders are declaring their determination to finding a solution to the Fiscal Cliff, but the President is leaving the country tomorrow for Burma and congress is already on an extended Thanksgiving break.

While the automatic tax increases for everyone caused by the expiring tax bills are significant; the coming increases in the transfer taxes (Federal Estate Tax, Gift Tax, and Generation Skipping Tax) are draconian. Here is a list of the changes:

• Reduction of Estate Tax Exemption from $5.12 Million to $1.0 Million
• Increase in Maximum Estate Tax Rate from 35% to 55%
• Reduction of Gift Tax Exemption from $5.12 Million to $1.0 Million
• Increase in Maximum Gift Tax Rate from 35% to 55%
• Reduction of Generation Skipping Tax Exemption from $5.12 Million to $1.0 Million
• Increase in Generation Skipping Tax Rate from 35% to 55%
• Loss of Portability (ability to transfer unused exemption from deceased spouse to surviving spouse)

To illustrate the impact of these changes let’s consider the dilemma facing John. John is an unmarried Washington State resident with $5.12 million of assets. Consider his potential estate tax for each of following situations:

For John, gifting in 2012 has the potential of saving his heirs over $2 million. Due to the Washington State Estate Tax, the gifting scenario results in more wealth being passed on tax free than holding the assets under the more favorable 2012. In addition, if the inheritance was left to grandchildren or a GST or Dynasty Trust, the 2013 scenario would be subject to an additional 55% GST tax.

Another factor in favor of gifting before the end of the year is the possibility of losing some of the more effective gifting and tax strategies that estate planners have used during my practice. Each of the following strategies has been proposed for curtailment by President Obama, Democratic Congressional leaders, or the Treasury Department during the last 4 years and are likely to be included in an eventual estate tax bill:

• Irrevocable Grantor Trusts – Currently trust such irrevocable life insurance trusts, family bank trusts, spousal gift trusts, and intentionally defective irrevocable trusts are excluded from the grantor’s estate; under the proposals future trusts would be included in the grantor’s estate.
• Short Term GRATs – GRATs or Grantor Retained Annuity Trusts would be required to have a term of at least 10 years.
• Dynasty Trusts – the proposals would create a Federal Rule of Perpetuities of 90 years.
• FLLCs and FLPs – Family Limited Liability Companies and Family Limited Partnerships would lose their discounts under the proposals.

While we can’t say for certain where the Federal Estate Tax law will end up, it is clear that it isn’t going to get better. Taking no action in 2012 will ensure that you are subject to the state estate tax, that your estate could be significantly reduced by a higher Federal Estate Tax, and that you could lose the availability of important tax planning strategies.

Assuming that you want to take action, you have two options: traditional estate planning gifts (outright gifts or gifts to irrevocable trusts) or what I am referring to as reverse gifts into irrevocable grantor trusts. I will discuss reverse gifts and traditional gifts in a future post, but for now think of a reverse gift as a gift where you retain the use and enjoyment of the property but gift the equity in the property.

With only 44 calendar days and 24 working days left until the New Year, how many days can you let go by before exploring your options and taking action.