[authors: Richard T. Hurt
, Ryan S. Ratner
, and Stephen D. Dunegan
This practice update outlines an estate planning strategy that may appeal to wealthy married clients who wish to use the $5 million federal gift tax exemption before it potentially reverts to a much lower level on January 1, 2013. The strategy involves each spouse creating and funding a trust with up to $5 million in assets for the benefit of the other spouse and, ultimately, the children or other heirs. During their joint lifetimes all of the assets are essentially available to provide for both spouses. When one spouse dies, the trust created for that spouse begins to benefit the children or other heirs. Meanwhile, the trust created by the deceased spouse continues to benefit the surviving spouse for the rest of his or her lifetime.
As no benefit is retained for the spouse creating the trust, once these trusts become irrevocable the taxable gift is complete. So long as this occurs in 2012, the individual may use up to their full $5 million lifetime exemption for federal gift tax purposes. Neither trust will again be taxable for estate or gift tax purposes when the benefited spouse dies so all appreciation in the assets after the gift is completed is excluded from both spouses' estates for federal gift and estate tax purposes.
These are not "typical" trust agreements, but rather sophisticated instruments, as the trusts have to be drafted properly to avoid the unintended inclusion of all of the assets in the taxable estate and loss of the exemption overall. Further, clients may prefer to wait closer to year end to create an irrevocable gift until Congress determines if any changes will be made to the estate and gift tax laws. The documents can be designed to create and fund the trusts now, but wait until closer to year end to decide whether to make them irrevocable. This option would allow the client to complete the planning without a rush over the next several months before any year-end madness begins on Capitol Hill over any new estate tax law.
Because this strategy could potentially control access to $10 million of assets, it probably is best utilized by clients who have at least $15 million in assets except as noted below. That way, the balance ofassets can be retained in a way that allows complete access. Alternatively, married clients can consider having only one spouse create such a trust for the benefit of the other spouse. That would tie up a maximum of $5 million of assets in an irrevocable trust while retaining total discretion over the balance of their assets. This alternative might make this strategy attractive to clients with even less than $15 million in total assets.
This strategy is designed to allow clients to take advantage of the $5 million lifetime exemption for gift tax purposes before it potentially expires under existing law at the end of this year. Since the lifetime gift tax exemption never exceeded $1 million until January 1, 2011, many clients would like to take advantage of what may turn out to be a true "once in a lifetime" opportunity. This strategy may appeal to those who want to use the $5 million lifetime exemption now while allowing their spouse to retain access to the funds.
For more information, please contact any member of our Trusts, Estates & Family Services Team