Act Now or Pay More Taxes

by Nexsen Pruet, PLLC
Contact

[author: Robert Lyerly]

Nexsen Pruet’s Estate Planning and Wealth Transfer Planning team is encouraging clients to consider making a gift of part or all of their estate exclusions now, or risk paying much more in taxes in the future.

If Congress fails to act during the next few months, the 2010 Tax Act, which extended the so-called Bush Tax Cuts, will expire at the end of 2012.  If the cuts are allowed to expire, there will be major tax increases.

Tax Increases of up to 400%

Type

Current

If 2010 Tax Act expires

Highest ordinary rate

35%

39.6%

Long term capital gains

15%

20%

Qualified dividends

15%

39.6%

Exclusion

$5.12 million

$1 million

Perhaps the most significant change is the potential of decreasing the exclusion from $5.12 million to $1 million.  This is because the exclusion can be used in a number of ways, such as excluding assets from estate tax and gifts from the gift tax and generation skipping tax.

Exclusion Could Drop from $10.24 million to $2 million

To illustrate how this large exclusion offers planning opportunities that have never been available before, consider this.  Currently, a married couple can exclude up to $10.24 million of property from estate tax at their deaths.  It also means that a married couple can give away up to $10.24 million during their lifetime without gift tax or generation skipping tax.

If Congress fails to act, allowing the provisions expire as scheduled on January 1, the estate exclusion will be reduced to $1 million per person, and the $4.12 million dollar difference would be subject to the 55% Estate Tax rate. That’s the equivalent of a $2.27 million tax hike!

President Obama is proposing a compromise, dropping the exclusion to $3.5 million.  But, if the congressional stalemate occurs with Congress, the Exclusion will automatically revert to $1 million.  What’s more, even if the estate exclusion is increased to a higher amount, there is a risk that the exemption for gifts and generation skipping transfers may remain at $1 million.

There was some concern initially that if the estate exclusion is reduced to $1 million and someone has given away their $5.12 million exclusion prior to this point, that the excess exclusion may somehow be clawed back.   Most advisors now believe that this was not the intention of Congress.  The general consensus among tax attorneys is that we do not believe excess gifts will be “clawed back” if the estate exclusion is later reduced.  We believe that the excess gift will be a permanent transfer of wealth from an individual’s estate.  While this is something that no one can guarantee, there is very little risk in any event, since the gift should remove appreciation from the estate on the assets transferred.

A final note about the exclusion as it currently stands.  If someone took the maximum gift exclusion in prior years, when the limit was $1 million, the current Estate and Gift Tax Laws allow that taxpayer to utilize the remaining portion of the $5.12 million exclusion.  Taking advantage of the $4.12 million dollar difference can result in a significant tax savings.

Other tax increases

Additionally, if the 2010 Tax Act expires, itemized deductions will be scaled back.  That could increase the highest ordinary income tax rate to as much as 42 to 43%.  Further, under the Obama Health Care bill, there will be a 3.8% Medicare Tax that will apply to earned income as well as investment income over certain amounts.  Planning is also required to minimize the impact of these new income tax rules.

Act now, or lose out

We are encouraging our clients to act now to consider making a gift of part, or all, of their estate exclusions now while the $5.12 million exclusion is in place.  If clients do not act now, they will lose the ability to transfer a greater amount of assets in the future. Additionally, if an individual gives away part or all of their estate exclusion now, all appreciation on the asset transferred will be removed from their estate.

Since the values of real estate and investments have been depressed - from a valuation standpoint, this could also be a great time to make gifts of these assets. 

There are a number of gift techniques available to make transfers and still maintain some control over the asset.  These techniques include creating the following Trusts and Entities:

  • Spousal Lifetime Access Trust (SLAT)
  • Qualified Personal Residence Trust (QPRT)
  • Grantor Retained Annuity Trust (GRAT)
  • Sales of Assets to an Intentionally Defective Grantor Trust
  • Irrevocable Life Insurance Trust
  • Family LLC or Family Limited Partnership

Good time to create a Trust

While the generation skipping exclusion stands at $5.12 million, an individual can create an Irrevocable Trust and transfer the entire amount of assets into it.  The Trust can be created to last forever or for a period of years (such as 500). Such a trust is called a Dynasty Trust.  Once the initial transfer to the Trust is excluded from gift tax and generation skipping tax by the gift exclusion and the generation skipping exclusion, no estate or generation skipping tax will ever be paid on the trust assets.  The income of the trust will be subject to income taxes but no transfer tax will apply.  Earnings on these assets can compound and are not reduced by estate tax which generally will take 35% to 55% of the assets at each generational level.   We believe this presents a great planning opportunity for our clients.  If a trust is created properly, the Trust assets can also be protected from creditors and divorced spouses.

Another technique to consider is to create Grantor Trusts where the grantor transfers assets to the trust and retains powers which cause the income of the trust to be taxable to the grantor. In this situation, the grantor has to pay the income tax.  The payment of the income tax is not a gift by the grantor.  This allows the trust to compound the earnings on the trust assets for the benefit of the beneficiaries on an after tax basis.

We are ready to help

Because of all of the estate planning opportunities, we recommend that you meet with a tax and estate planning attorney to discuss your planning opportunities as soon as possible.  We strongly recommend that you make gifts as early as possible in 2012.  It is possible that a law could be passed after the November election that will reduce the exclusion or repeal or limit some of the planning opportunities discussed in this alert.   It takes time to create entities and to make transfers and, if you wait too long, you may not be able to complete the gifts by December 31, 2012.

This may be a once in a lifetime opportunity to shift wealth to the next generation with little or no estate tax. Please contact me at 704 338-5324 or at rlyerly@nexsenpruet.com if we can be of assistance to you in connection with your planning.

U.S. Treasury Department Circular 230 Disclosure: In accordance with applicable professional regulations, please understand that, unless specifically stated otherwise, any written advice contained in, forwarded with, or attached to this communication is not a tax opinion and is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding any penalties that may be imposed under the Internal Revenue code or applicable state or local law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nexsen Pruet, PLLC | Attorney Advertising

Written by:

Nexsen Pruet, PLLC
Contact
more
less

Nexsen Pruet, PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.