Gift Tax Sale…

Gifting has always been a very effective estate planning tool. Not only does a completed gift generally remove the gifted asset from the donor’s estate, it also removes any future appreciation from the estate and may offer income-shifting advantages.

Important changes for 2011 and 2012:

• The lifetime gift tax/estate tax exclusion is increased to $5 million per person ($10 million per couple) with a top tax rate of 35 percent. This increase is unprecedented and creates a rare opportunity for large gift-tax-free wealth transfers.
• The generation-skipping transfer-tax exemption is increased to $5 million.
• The gift and estate tax is reunified. Simply put, to the extent the exclusion is used for gifts during the donor’s lifetime, it is unavailable for bequests upon death.
• Beginning in 2012: The exclusion amount is subject to indexing
• As the law stands today, these limits will be reduced beginning in 2013

Rare Opportunity to Transfer Wealth!

A case study…

• Ron and his wife are both in their middle-50s and have one son. Their net worth is over $8 million. Ron wants to provide a safety net for his wife and leave a legacy for their son and any future grandchildren, all the while minimizing transfer taxes.
• Ron establishes an irrevocable life insurance trust (ILIT), with spousal lifetime access provisions to the cash value. He gifts $1 million to the ILIT, using a portion of his lifetime gift tax exclusion and generation skipping transfer tax exemption.
• The trustee then uses the $1 million to purchase a 10-year certain immediate annuity. The annual after-tax guaranteed income payment is slightly more than $103,000.
• The trustee then uses $102,000 of the annual payment to purchase a universal life policy with a death benefit of approximately $4,400,000.
• Upon Ron’s death, the proceeds of the life insurance policy are to be held by the trustee, with income to be paid to his wife for life.
• Upon her death, income is to be paid to his son for life, and then to his son’s children for life, etc.
• The funds in the trust will escape estate taxation at each death.
• Also, any transfers out of the trust to skip persons (generally persons two or more generations younger than the grantor) will be exempt from any generation skipping taxes.

Discussion…

Gifts may be transferred outright or in trust. An outright gift gives the donee unrestricted control of the property. This may not be suitable if the donee is a minor or a spendthrift. Gifts in trust offer the donor the ability to control the distribution of income and principal, while providing asset management and creditor protection for the trust’s beneficiaries.

Properly structured gifts of life insurance policies and/or premiums offer the donor the ability to leverage the value of the gift by removing the death proceeds from the donor’s estate.

The unlimited marital deduction for gifts and bequests to spouses remains unchanged, as does the annual gift tax exclusion permitting donors to give up to $13,000 ($26,000 for a married couple) worth of gifts to any number of persons each year without incurring a gift tax.

The annual gift-tax exclusion amount is indexed for inflation and is available for certain present-interest gifts to trusts requiring the use of a special notice each time a gift is made to the trust. However, use of the gift tax lifetime exclusion, instead of using the annual gift tax exclusion, means no special notices are required.

Gifting strategies for 2011 and 2012…

Using a cash value life insurance policy to fund the trust provides flexibility in uncertain economic times and amid changing tax laws. Flexibility in drafting trust documents, such as spousal lifetime access or trust protector provisions, can also be beneficial. Taking advantage of the two-year gift tax sale by making gifts in 2011 and 2012 up to the maximum amount of your available gift tax exclusion may result in your heirs receiving significantly more wealth.

by Jeffrey Reeves MA, EUREKONOMIST™