2012 Wealth Transfers - Trusts & Estates Law Alert
The Sun Sets on 12/31/12
February 27, 2012
By: Meyer, Suozzi, English & Klein's Trusts, Wills and Estates Attorney Patricia Galteri
The favorable estate, gift and generation-skipping transfer (GST) tax changes that were put in place by the 2010 Tax Relief Act are scheduled to expire on December 31 of this year. Through the end of 2012, the law provides that gift transfers may be made in the following extraordinary amounts without incurring gift taxes, assuming no prior use of gift tax exemption:
- For a single taxpayer, up to $5,120,000
- For a married taxpayer, up to $10,240,000
At year end, unless a new law is passed by Congress and signed into law by the President, the 2010 Tax Relief Act will sunset and the estate and gift tax exemption will plummet to $1 million, the GST exemption will fall to $1 million (with an inflation adjustment), and the top gift, estate and GST rates will spike from 35% to 55%.
A prediction of what Congress and the President may do or try to do about the exemption amounts and tax rates come January 1, 2013 would be guesswork.
For instance, in a February, 2011 Department of Treasury publication, the current Administration set forth budgetary proposals, including its desired changes to the federal estate, gift and GST provisions, which would restore the 2009 estate, gift and GST tax rules, providing for a $1 million gift tax exemption, a $3.5 million estate and GST exemption, and a top estate, gift and GST tax rate of 45% as of January 1, 2013. A variety of other proposals have also been introduced.
In light of the increased exemptions, those who are able to make substantial gifts of assets should take advantage of the wealth transfer opportunities now. Significant gifts may be made through a host of different methods, including:
• Take advantage of the increased exemption by year end, while removing future
appreciation from the estate.
• Valuation discounts for lack of marketability and minority interests may be available
upon the gift of certain assets such as in closely-held entities.
Gifts in Trust, Including:
• Qualified Personal Residence Trusts (QPRTs). These trusts are a popular method
for gift minded donors who may be concerned about an immediate loss of liquidity.
By creating a QPRT, a donor can make a gift in trust, at a reduced gift tax cost, of a
personal residence in exchange for its continued use rent-free for a term of years
selected by the donor. At the expiration of the term, the residence passes at no
additional gift tax cost to the selected beneficiaries. If the donor wishes to continue
to occupy the residence after the expiration of the term, it must be rented from the
• Intentionally Defective Grantor Trusts (IDGTs). Assets gifted to an IDGT are removed
from the donor's estate for gift and estate tax purposes, but the donor remains
responsible for payment of income taxes which payments are, in effect, additional
non-gift taxable transfers to the IDGT. In addition, establishment of an IDGT provides
a vehicle for selling assets of the donor to the IDGT, without incurring a capital gain,
in exchange for a promissory note. Any assets in the IDGT remaining after the
Promissory Note is paid back to the donor are transferred to the beneficiaries free
from federal gift or estate tax.
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