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Running Out of Time for 2012 Estate Planning Opportunities

With significant tax increases scheduled for Jan. 1, 2013, time is running out to take advantage of unprecedented opportunities to transfer assets to your family in 2012. Under current tax law, a U.S. citizen may give anyone up to $5.12 million (the “Current Exemption”) during 2012 without paying any federal gift taxes. Any gifts made before year-end greater than the Current Exemption would be taxed at a flat 35 percent federal gift tax rate. Unless Congress agrees to extend the Current Exemption, the federal tax on gifts will increase up to 55 percent on lifetime gifts over $1 million. Those interested in taking advantage of the current tax laws are encouraged to consult with their advisers about planning opportunities as soon as possible.

2012 Lifetime Transfers to Your Family

Transfers of property to trusts for the benefit of a spouse, children and grandchildren during 2012 may yield significant overall savings for your family.

Each person may gift up to $5.12 million of unused exemption during 2012 before triggering a federal gift tax. A married couple can act to transfer up to $10.24 million of unused exemption during 2012 without triggering any federal gift tax. However, the same gift on Jan. 1, 2013 would be taxed at rates of up to 55 percent on the amount over $2 million (or $1 million if the gifts are not “split” by a married couple).

Those interested in making large gifts before year-end should discuss with their tax advisers how to structure the proposed gift to best meet the needs of the donor and donee, in addition to the potential tax savings.

2012 Lifetime Transfers to Dynasty Trusts

Transfers of property to irrevocable “dynasty trusts” with a potentially unlimited term can build and preserve wealth for generations of family members by shielding trust assets from estate and generation-skipping taxes, as well as certain creditors.

Each person who makes a gift of up to $5.12 million (less certain other lifetime gifts) during 2012 can allocate exemption from the generation-skipping transfer tax to a “dynasty trust.” Such gifts could include each spouse creating a dynasty trust with different terms for the other spouse.

These dynasty trusts can avoid not only current gift taxes but also future transfer tax consequences when trust assets are distributed to the donor’s grandchildren (or upon the death of the donor’s children). Those able to transfer assets with appreciation potential can accumulate significant assets for future generations and secure substantial savings on future estate and gift taxes.

2012 Transfers of Closely Held Business Interests

With historically low interest rates and generally depressed business conditions, many closely held businesses can support lower valuations than in more normal economic times. When combined with other transfer techniques, families can transfer interests in closely held businesses to the next generation at substantially reduced transfer tax values.

Transfers to Grantor Retained Annuity Trusts

Not everyone can make significant gifts before year end. A person who may need to use gifted assets in the future or has already used his or her exemption can create a grantor retained annuity trust (“GRAT”) that pays its creator annual payments as an annuity over a fixed trust term.

Current law allows the GRAT to be formed with no taxable gift, so that the fair market value of the property transferred to the GRAT equals the present value of the annuity returned to its creator based upon the applicable IRS assumed interest rate (1.2 percent for transfers to GRATs during October 2012). If the GRAT assets outperform the 1.2 percent IRS interest rate, the GRAT will have assets remaining after paying the annuity, which would pass at the end of the trust term transfer tax-free to whomever the grantor has selected.

The usefulness of GRATs will continue in 2013, as long as interest rates remain low and Congress does not adopt proposals to diminish the usefulness of this technique. For example, some proposals have sought to impose a minimum 10-year term or require a taxable gift upon creation of the GRAT.

Improving Existing Planning

A current gift isn’t necessarily required to take advantage of the Current Exemption. In certain circumstances, individuals can take advantage of the increased exemption amount available during 2012 by making existing trusts more tax-efficient. For example, it may be possible to allocate exemption from the generation-skipping transfer tax to existing trusts that would be subject to tax when assets pass to the grantor’s grandchildren. Another planning option may be to forgive debts owed to you by children or family trusts.

A careful review of your estate plan may identify other opportunities to apply the current tax law in ways that were not previously available but that may no longer exist after year-end.

© 2022 Neal, Gerber & Eisenberg LLP.National Law Review, Volume II, Number 278

About this Author

Michael C. Diedrich, Senior Counsel, Neal Gerber law firm
Senior Counsel

Michael C. Diedrich has advised high net worth individuals and their families on complex estate, gift, generation-skipping and other tax planning matters. He has also counseled individuals, trustees and entities on tax compliance, foreign trust reporting, insurance transactions and financial planning techniques.

Michael has implemented succession and wealth transfer planning strategies involving closely held businesses as well as publicly traded companies. He has advised trustees on how to satisfy their fiduciary obligations to trust beneficiaries, efficiently administer their...

Marshall E. Eisenberg, Partner, Neal gerber law firm

Marshall E. Eisenberg has an extensive background in mergers and acquisitions; real estate transactions; estate planning and probate; federal, state and international taxation, including tax controversy; securities offerings; joint venture formation; and venture capital. He has significant experience in matters relating to real estate investment trusts. He is a member of the firm’s Executive Committee.

Marshall began practicing law in the area of corporate taxation and now focuses on complex tax planning and major corporate merger and acquisition transactions. His estate planning...

Lawrence I. Richman, attorney, neal gerber law firm

Lawrence I. Richman’s practice involves advising entrepreneurs, tax-exempt organizations, fiduciaries and high net worth families on estate, gift and charitable planning issues, including business succession, tax-efficient ownership structures, sophisticated tax-exempt structures, trust and estate administration, executive benefits, life insurance and international estate planning issues.

Larry has served as chairman of the Trust Law Committee of the Chicago Bar Association, and is a frequently published author and speaker. He is also the Estate and Succession Planning columnist for...

Scott J. Bakal, attorney, neal gerber law firm, Partner

Scott J. Bakal, co-chair of Neal Gerber Eisenberg's Taxation practice group, specializes in finding tax-sensitive solutions to complex financial situations, business transactions, and estate planning matters. Scott works primarily with entrepreneurial companies and high net worth individuals. Scott frequently represents commodities and securities traders, family offices, owners of business jets and companies and executives in employment...

312- 269-8022
Martin H. Tish, Private Wealth Services attorney, Neal Gerber law firm

Martin H. Tish counsels business owners, executives, entrepreneurs, traders, charities, family offices and individuals from virtually every field regarding asset ownership and structure, prenuptial agreements, retirement planning and charitable planning. He has successfully administered estates and trusts ranging in size from $500,000 to more than $100 million, achieving excellent tax results without forgetting the human concerns that are of paramount importance to a sound estate plan.

Marty has lectured on estate planning before the Chicago Bar Association, the American Bar...