You should consider making lifetime gifts, in trust or outright, in order to use your federal lifetime gift tax exemption now instead of waiting to use your federal estate tax exemption at death. A married couple can transfer up to $10.5 million (indexed for inflation) during their lifetimes, which can benefit multiple generations with no additional wealth transfer tax.
Lifetime Gifts. A lifetime gift will appreciate outside of your estate, thereby avoiding federal and state estate tax on the appreciation.
Inflation Adjustment and Topping Off Previous Gifts. Even if you made gifts in the amount of the 2012 federal lifetime gift tax exemption — $5.12 million — you can still take advantage of inflation adjustments to the federal lifetime gift tax exemption. The federal lifetime gift tax exemption has risen to $5.25 million in 2013, thereby enabling you to shield an additional $130,000 from federal gift tax this year (or $260,000 total per married couple).
Short-Term GRATs. Short-term grantor-retained annuity trusts (GRATs), which had been threatened under earlier legislation, remain a viable technique. With this technique, the donor retains the right to receive an annuity for a period of time. After that period expires, any remaining property passes to specified beneficiaries — usually the donor’s descendants (outright or in trust) — free of any gift tax. Short-term GRATs significantly reduce the volatility embedded in a longer-term GRAT. Legislation has been introduced on numerous occasions that would require the minimum annuity term to be 10 years. Such a rule was not included in the 2012 legislation.
Gifts of Discounted Assets. Valuation discounts (e.g., discounts for lack of control and lack of marketability), while targeted in the past, remain viable at present. These may go bye-bye in the coming years, so it’s time to act now.
Grantor Trusts/Sales to Grantor Trusts. A popular estate planning technique is the sale or gift of assets to an “intentionally defective grantor trust” (a trust that is out of your estate for federal estate tax purposes but taxable to you for income tax purposes). You would either gift assets (frequently at a discounted value) to the grantor trust or sell assets in exchange for a note. Because of the grantor trust status, no gain is realized on the sale. In the case of a sale, if the transferred assets earn more than the required interest rate, the note can be paid down; this is a very effective technique presently since interest rates are at historic lows. In addition, any appreciation will ultimately pass to the specified beneficiaries. The president’s 2012 budget proposal recommended legislation that would include property transferred to a grantor trust in the donor’s estate for federal estate tax purposes. Since no such legislation has yet passed, the use of grantor trusts remains an effective technique.
Review Your Wills/Revocable Trusts Now
Many married couples’ estate plans include so-called “credit shelter” (or “by-pass”) trusts, which have historically been needed in order to use the federal estate tax exemption of the first spouse to die. With portability now permanent, certain of these trusts may no longer be needed. Look at a Disclaimer Trust as a possible option instead.
Your estate plan should be revised as required to reflect any gifts previously made in 2011 or 2012 that would alter the plan.
Many Wills and revocable trusts include a provision creating a credit shelter trust that will be funded with the maximum amount that can pass free of federal estate tax at the person’s death. Your estate plan and your finances should be reviewed to determine whether it is appropriate for you and your spouse to fund your respective credit shelter trusts with the full $5.25 million (or possibly a lesser amount).
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. Randall A. Denha, J.D, LL.M., is principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. He can be reached at (248) 265-4100 or by email at firstname.lastname@example.org.