Windows of Opportunity: Year-End Gift Planning Opportunities for 2012

by Ballard Spahr LLP

Although the end of the year is several months away, it is time to think about taking advantage of the generous tax savings that may be available for 2012 only.

The 2010 Tax Act made significant changes to the estate, gift, and generation-skipping transfer (GST) tax laws for 2012, boosting the exemption amount for each to $5.12 million for individuals (a $4.12 million increase from the previous $1 million exemption amount) and lowering the top tax rate to 35%.

What This Opportunity Means. An individual can give up to $5.12 million ($10.24 million for a married couple), less previous gifts, without incurring gift or GST tax. Making a lifetime gift removes the gift and future income from and appreciation on it from the individual’s taxable estate.

Why Consider Acting Now? Unless Congress acts before December 31, the $5.12 million exemptions and 35% tax rates will disappear in 2013, and estate, gift, and GST taxes will revert to 2001 levels: exemptions will decrease by $4 million and top tax rates will increase to 55%. It is not clear, however, that acting now is wise or necessary in all circumstances. As with any substantial and irrevocable gift, there are important non-tax considerations that need to be weighed first. It is important to note that (1) Congress could extend or reinstate all or some of the exemption to be reduced on December 31, and (2) there is also a risk (considered by most to be remote but conceivable) that Congress would “claw back” at death the tax that would have been otherwise imposed if no gift had been made. The situation is thus complex. We would be pleased to discuss how those issues may apply to your specific circumstances.

Options for Giving. If you wish to take advantage of the $5.12 million gift tax exemption, there are a variety of available gifting methods. The simplest is an outright gift of cash, but other assets (real property, securities, artwork, etc.) can easily be gifted. Gifting some assets, however, such as real estate or partnership interests, requires more time because steps must be taken before a gift may be completed. And the gift need not be outright—the benefits of the exemptions can be compounded by making gifts to long-term GST-exempt family trusts for the benefit of future generations. Such trusts can avoid transfer tax for generations and can be drafted to suit the needs of you and your beneficiaries.

Qualified Personal Residence Trusts. For those who may not want to part with income-producing assets, but have a substantial investment in a personal residence, the qualified personal residence trust (QPRT) is an alternative technique to remove assets from your estate. In a QPRT, the grantor transfers his or her home to a trust for a term of years. The home’s gift tax value is reduced because the grantor retains the right to possess the home for the QPRT term. The longer the term, the smaller the gift. At the end of the term, the property passes to the remainder beneficiaries, free of additional tax. If the grantor dies during the QPRT term, however, the property reverts to his or her estate. Although QPRTs are most attractive when interest rates are high, a QPRT can be an attractive means to take advantage of the 2012 exemptions.

Other Planning Opportunities in a Low Interest Rate Environment

Interest rates are near historic lows. In such a climate, wealth can be transferred to younger generations through several techniques that minimize or eliminate adverse tax consequences.

Intra-Family Loans. With Applicable Federal Rates (AFRs) near historic lows, it is a good time to consider making intra-family loans or refinancing existing intra-family loans. Through an intra-family loan, one relative makes a loan to another with an interest rate set at the current AFR for the specified loan term. Based on current rates, even a long-term loan will enjoy a low interest rate. (For example, the AFRs for October 2012 are 0.23% for loans not over three years, 0.93% for loans over three years but not over nine years, and 2.36% for loans over nine years.)  The borrower can pay down higher-rate debt or make investments expected to return a higher rate. Returns on investment over the AFR may be retained by the borrower free of gift tax.

Grantor Retained Annuity Trusts. A grantor-retained annuity trust (GRAT) performs optimally during periods of low interest rates. The grantor transfers assets to a trust for a term of years and, over that period, the trust pays the grantor the original value of the assets, plus a return based on another federal rate, the Section 7520 rate, or “hurdle” rate. The October 2012 rate is 1.2%. Any growth over the hurdle rate passes tax-free to the remainder beneficiaries. The current low rate makes it more likely that the assets will outperform that rate. If creating a GRAT sounds appealing, we should discuss it further. There is a risk that Congress will impose new requirements for GRATs that could make them less desirable.

Sales to Grantor Trusts. A sale of assets to a “grantor trust” also works optimally during periods of low interest rates. The technique works best if the sale is made to a previously funded trust. The trust’s creator sells additional assets to the trust for a stated consideration, most of which is paid by a note. The note bears interest at a stated IRS “hurdle” rate, and principal need not be repaid until the end of the note term. The interest rate will depend on the note’s date and payment terms. For October 2012, available interest rates would range from 0.23% to 2.36%. Any growth on the asset sold over the hurdle rate passes tax-free to the trust and its beneficiaries. This technique is similar to a GRAT but, in some cases, presents greater opportunities for tax-free transfers and planning for multiple generations. This is a complex technique with several other pros, and some cons. If it is of interest, you should discuss it further with us.

Charitable Giving. Certain charitable giving techniques are also more advantageous during periods of low interest rates.


Ballard Spahr’s Family Wealth Management attorneys are available to answer any questions that you may have and to assist you in all your estate-planning needs. Please do not hesitate to call or e-mail any one of us.

IRS “Circular 230” Disclaimer Note:  Under certain circumstances, a taxpayer may avoid certain penalties under the Internal Revenue Code by relying on a formal opinion of counsel that meets specific IRS regulations. Any tax advice in this communication does not constitute a formal opinion that meets the requirements of those regulations. Accordingly, the IRS regulations require us to advise you that any tax advice in this communication is not intended or written to be used, and cannot be used by you, to avoid penalties that the IRS might attempt to impose on you.

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.

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