[This posting was authored by my partner, Jordan Klingsberg]
This may be the best time to transfer a large amount of wealth without transfer taxes. Unfortunately time is running out on this short term opportunity because the current generous gift-tax exemptions are scheduled to expire at the end of 2012.
The lifetime exemption from Federal gift tax has been at its highest level the last two years. During 2011 and 2012 individuals have been able to transfer up to $5 million, or $10 million per married couple, without Federal gift tax ($5.12 million/$10.24 million in 2012). Now may be the best time to take advantage of this increased exemption for the following reasons:
1. Unless Congress and the President come to a compromise, the 2010 Tax Act will automatically expire at the end of 2012. The current lifetime estate and gift tax exemptions of $5 million plus for individuals will drop to only $1 million. The Federal estate tax rate will also increase to 55%.
2. In many instances, valuation discounts are allowed for closely held business interests. There exists some concern, however, that Congress could pass legislation that effectively would eliminate such discounts and other estate planning techniques.
3. We are presently experiencing historically low interest rates. These rates combined with depressed asset values, particularly for real estate, enhance many estate planning techniques.
4. The current law allows the same generous exemptions for "generation-skipping transfers" so gifts can be made to trusts for grandchildren as well as children.
5. Many of the transfer techniques that allow a donor to take advantage of gift, estate, and generation skipping tax savings may also provide an added level of asset protection for the assets.
To use up part or all of his or her gift tax exemption, a donor must make a completed gift of the assets, either outright or through a trust that is irrevocable, and without a retained interest. This may not be an attractive option if there is a concern that the donor may need the gifted funds in the future. Donors should be aware, however, that there are methods that may allow them to both take advantage of their gift tax exemption and retain some access to the transferred assets. One such technique is having one spouse set up an irrevocable trust for the benefit of the other spouse. This planning has its own benefits and drawbacks.
The increased lifetime exemption from gift tax effectively provides a donor and his or her spouse with the ability to remove $10 million plus, and all future appreciation on those assets, from their taxable estates. However, it is important to act now to take advantage of the current exemption levels and other laws that are set to change soon. Given the anticipated level of last minute planning activity anticipated this year, interested donors are best advised to consult with their estate planning counsel sooner rather than later.