Tax Law Changes. The 2010 Tax Act made some significant changes in the tax laws that effect gifts. The exemption for lifetime gifts was increased from $1 million to $5 million ($10 million in the case of a married couple making joint gifts) effective January 1, 2011. The estate tax exemption was also increased to this amount so that the gift and estate exemptions are now the same. This significantly increases what you can give to your children both during life and at death. However, the increase is only guaranteed through 2012. Unless Congress and the President agree to extend it, the law will expire on December 31, 2012 and beginning January 1, 2013 the old levels of $1 million for gifts and $1 million for estates will return.
Thus, people who plan to pass on large estates above $1 million or who contemplate large gifts should seriously consider doing their lifetime gifting before the law expires. Since 2012 is an election year and the President and the Republican House have very different ideas on taxes, it should not be assumed that the current $5 million exemption will be continued past 2012.
Gifts to Grandchildren. The 2010 Tax Act also raised the Generation Skipping Tax exemption to $5 million ($10 million for a married couple). The Generation Skipping Tax (“GST”) is a tax imposed on gifts to grandchildren and other heirs below your children’s generation. It is in effect a second estate or gift tax and should be avoided. One way to take advantage of the new gift and GST exemptions is to set up a GST Trust. Under such a trust, property with a value of up to $5 million ($10 million for a married couple) can be set aside in a trust which would last for several generations. Your children could be the beneficiaries along with your grandchildren and in some cases great grandchildren. This would protect the trust from estate taxes imposed at your children’s deaths and possibly the deaths of your grandchildren and great grandchildren as well.
These trusts have other advantages such as asset and creditor protection, protection from the claims of a spouse in the event of a divorce, and financial management by a professional trustee if you decide to go that route.
The trust can also be structured so that the child can be a trustee.
Your child can also be given the ability to designate who receives the trust at the child’s death by you giving the child a special power of appointment to designate beneficiaries through their own Will.
A lot of flexibility can be written into the GST trust and still retain the tax and creditor protection benefits described above.
Adding Leverage. The GST Trust can be funded with family limited partnership (FLP) gifts which due to the way limited partnership interests are valued may allow for even larger gifting.
Through the use of lapsing “Crummey” withdrawal powers, the trust can be structured so that annual exclusion gifts ($13,000 per donor or $26,000 for a married couple) can also be utilized. Such gifts are not counted against the $5 million gift exemption.
Conclusion. If you have a large estate and may be facing significant estate taxes if the exemptions revert back to $1 million ($2 million for a married couple) you should consider doing planning now to lock in the current $5 million ($10 million for a married couple) lifetime gift and GST exemptions.