Endangered ways to limit gift, estate taxes

Preferential gift and estate tax treatment afforded under current law is set to expire Dec. 31. You should consider taking steps now to take advantage of the favorable tax laws before year-end.

Under current law for 2012, each person has the ability to gift or dispose of assets at death up to $ 5.12 million (double for a married couple, or $10.24 million) without the imposition of a gift tax, estate tax or a generation-skipping transfer tax. To the extent a gift or estate exceeds the exemption amount of $5.12 million, a transfer tax is imposed at the reduced rate of 35 percent.

While the Obama administration has made many proposals to change the estate and gift tax laws, the political climate leaves estate and gift tax laws in a state of uncertainty. Unless Congress acts and passes new legislation before year-end, the amount that can pass free of gift or estate tax will revert to $1 million on Jan. 1. Transfers in excess of this amount will incur gift or estate tax at much steeper rates, reaching 55 percent at $3 million.

There are a number of techniques that can be used now to take advantage of the increased exemption amount without incurring gift tax.Outright gifts

You can make an outright gift of a variety of assets, including cash, securities, and real or personal property. Transferring assets with a higher potential appreciation will result in even greater transfer-tax savings by moving future appreciation to the next generation.

Furthermore, under current law -- which legislators have proposed changing -- gifts of fractional interests in real property and minority interests in businesses (partnerships, LLCs, etc.) may be "discounted," or valued to reflect the lack of marketability and control associated with the gifted interest.

For example, a gift of a 20 percent interest in a business worth $10 million might be valued for gift-tax purposes at $1.5 million rather than $2 million.Gifts in trust

If you are not yet ready to transfer significant wealth to your children or grandchildren outright, consider making such gifts in trust. The trust can allow you to maintain more control over the timing of distributions by structuring the trust to distribute to your designated beneficiary at specific ages or for a specific purpose, such as health care or education. The trust can also be structured as a "dynasty" trust, which can be maintained for generations without the imposition of tax.

An additional type of trust to consider is a "grantor" trust. A grantor trust allows for a complete gift for transfer-tax purposes, but continues to be treated as owned by the grantor for income-tax purposes. The grantor or creator of the trust will be required to pay the taxes on all income, but the assets transferred to the trust are not includable in the estate of the grantor. The payment of the income tax on the income of the trust is not treated as a gift by the grantor, thus the trust grows income tax--free and the grantor’s estate is reduced.

Legislators have proposed coordinating the income and estate tax rules to eliminate the benefits of a grantor trust, essentially closing the unintended transfer tax benefits.Life insurance trusts


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