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  • Barry Boscoe

Gifting Prior to 2013

By now you are aware that come 2013 we may see an entirely new estate and gift tax landscape. If Congress fails to make changes to the current law, then January 1, 2013, will have the estate and gift tax revert back to 2002 wherein the estate and gift exemption are $1,000,000 per person with a 55% tax rate. The news media’s message has been, “Make gifts before the law changes in 2013.” This is not just for the ultra-wealthy, and no gift should be made outright; instead, the gift should be in trust. No matter the amount you decide to give, the gift should be made to one or more trusts, never outright to an heir. There is a whole host of reasons for utilizing trusts when making gifts. Just to name a few, you have: 1) the ability to provide asset protection; 2) divorce protection; and 3) the ability to preserve Generation Skipping Transfer Tax benefits, meaning that the assets will be kept out of the Estate Tax Transfer system forever. When structuring a trust, it can be designed as a Grantor Trust, providing the Donor the ability to sell assets to the trust without triggering Capital Gains Tax and allowing the Grantor/Donor to pay the tax on the trust income thereby allowing the assets in the trust to grow in value faster while shrinking the assets left in the Donor’s estate, hence reducing assets reachable by creditors or subject to estate tax. Unfortunately, the advantages listed above are on Obama’s hit list and are targeted to be reduced or completely eliminated. One of the common myths about gifting is the loss of the use of the asset that has been gifted. I’m here to tell you that you have the ability to retain the benefit from the assets in the trust. This can be done by setting up a trust for your spouse/partner and all future descendants. As long as your spouse/partner is a beneficiary, you can indirectly benefit. In addition to that, you can also set up a Domestic Asset Protection Trust (DAPT) and be a beneficiary of your own trust. This type of gifting is equivalent to having your cake and eating it too. Even though gifting can take advantage of the current law, sales of assets to trusts will also provide a very large benefit that could disappear when the year changes. As an example, if you were to sell 45% of your interests in the family business valued with a 40% discount that would provide huge leverage. The use of discounts may also disappear with the potential new tax laws. It’s conceivable that many of the trusts established will have little cash to pay for the purchase; thus, the sales can be structured as a note. Interest rates are at historical lows, thus transferring beyond the $5,120,000 exemption is a distinct possibility. When designing the trust, this is not a time to pull one off the shelf; this is a custom-tailored suit that you wish to wear. Some considerations when designing the trust are as follows: 1) Should you be a beneficiary? If your answer is “yes” then there are precautions that must be taken and only certain states in which the trust can be established; 2) Should the trust be a Grantor Trust? Remember the disadvantage of a Grantor Trust is that you will pay the taxes on the trust income or gains. The advantage is you’re able to sell an asset to the trust without paying Capital Gains; 3) If two trusts are set up – one for each of you and your spouse/partner – then how do you avoid the “Reciprocal Trust Doctrine”? The Reciprocal Trust Doctrine allows the IRS to uncross the trusts thus causing taxation in the estate, thereby entirely negating the planning. It’s imperative that there is a differentiation between the trusts, utilizing different powers, distribution standards, signing them up on different dates, even to the point of using different assets; 4) Utilizing an FLP or LLC to make your gifts could cause a problem if the assets are not inside the entity long enough. The IRS will argue that the gifts were the underlying assets and thus no discount will be applied. As you can see, time is of the essence. Everyone should be reviewing their planning options for themselves and their families in order to ascertain what benefits they might be able to glean prior to the potential tax law changes at year end. In addition they need to understand how to expedite the process so that the planning is completed in advance of the year end.

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