Dedon on Estate Planning

Obama 2012 Budget and Estate Planning

President Obama submitted his 2012 Budget Proposal on February 14. As expected, the Administration is calling for higher taxes to help reduce the deficit. On the income tax side, rates would rise for taxpayers with adjusted gross incomes exceeding $200,000, or $250,000 for a married couple. Indirectly, income taxes would also rise by limiting itemized deductions.

Turning to the estate side, Obama proposes a return to 2009 law starting in 2013. There would be a $3.5 million exemption amount upon death and a $1 million lifetime gift exemption. Currently, taxpayers can protect $5 million either upon death or with lifetime gifting. Thus, high net worth taxpayers wishing to protect as much as possible from estate tax should act now while a $5 million exemption applies for lifetime gifts (as well as favorable low interest rates and relatively low asset values). There are additional reasons to act now: The Administration is again targeting advanced planning techniques, such as GRATS, intra-family discounting, and generation skipping planning.

One bit of good news: The Obama plan would extend "portability" of estate and gift exemptions, meaning a surviving spouse can use the unused gift and estate tax exemptions of his or her predeceased spouse. Portability can help solve estate tax problems caused when a married couple fails to position their assets properly prior to the first death.

Unfortunately, the last few years has established that the estate law is impossible to predict as Congress and the President, regardless of party, continue to change the rules, making planning fluid and difficult.

Gifting Opportunities

See the attached column I wrote for Virginia Business Magazine that was published online on 2/14/11 pertaining to wealth transfer opportunities using the $5 million gift exemption with an Irrevocable Trust and life insurance.  Download Va bus art 2-14-11

New Law and Transfer Opportunities

The law signed by President Obama on December 17, 2010, extending the Bush income tax cuts, came with a surprise estate and gift tax benefit for high net worth individuals – a $5 million gift and death tax exemption. Thus, individuals can protect $5 million from estate tax upon death (or $10 million for a married couple).

For most of us, the ability to protect $5 million from estate tax is sufficient. However, many individuals have assets that exceed that amount. Moreover, the law is only for two years, leaving us with the same uncertainty in 2012 that we faced in 2010. Further, many states, such as Maryland, only allow a $1 million exemption (fortunately Virginia currently has no estate tax).

Thus, rather than wait until death, many individuals should take advantage of the extraordinary wealth transfer opportunities available due to tax-free gifting of up to $5 million of assets. Most of us in the estate tax world were surprised when the estate tax exemption was increased to $5 million. However, we were shocked when the law allowed for gifts of up to $5 million. While increasing the gift exemption to $5 million for two years, Congress left untouched for now gifting strategies, such as GRATS and intra-family discounting of assets.

The bottom line? High net worth individuals should strike while the estate and gifting law is in their favor. There are a number of strategies available, many of which I have written about in the past, such as GRATS and gift/sale techniques to intentionally defective trusts.

Certain strategies take advantage of gifting and the advantage of life insurance to protect and leverage the assets for the family and future generations. The common denominator in these strategies are 1) an Irrevocable Trust; 2) transferring assets into the Trust; and 3) a portion of the transferred assets, or a portion of the income generated from the transferred assets, is used to purchase a life insurance product. Because an Irrevocable Trust is used, the assets are protected for the children and future generations in perpetuity from estate tax and also from creditors and failed marriages. The transfer to the Irrevocable Trust constitutes a completed gift, and the donor takes advantage of the $5 million gift exemption. Thus, when the insurance is purchased inside the Trust, there are no further gift tax consequences. The advantages of purchasing life insurance by the Trust include diversifying and leveraging the Trust assets; providing liquidity upon death to pay death taxes; and providing tax free cash accumulations inside the policy which could be tapped by the Trust beneficiaries during the insured’s life.