Estate planning: Today’s window of opportunity | submitted by Melissa Selinger

To the dismay of investors in today’s economy, it often seems the only predictable aspect of their holdings is unpredictability. However, there is somewhat of a silver lining in the combination of falling asset values, historically low interest rates, and the unprecedented $5 million gift tax exemption, which is scheduled to expire on Dec. 31, 2012, or possibly sooner, along with other historically unique estate, gift, and generation-skipping transfer (GST) tax laws.

Current economic conditions afford business owners, families, and other individuals a rare opportunity to shift a greater amount of wealth from their estates to younger generations in order to obtain better tax results. There are several estate-planning techniques available that would allow taxpayers to take advantage of this unique economic time.

Current transfer tax law includes unprecedented exemptions and lower rates

  • The estate, gift, and GST tax exemptions are $5 million per taxpayer ($10 million per married couple) for the remainder of 2011 and 2012 (increased for inflation). These types of tax are often referred to as “transfer taxes.”
  • The estate and gift tax exemptions are scheduled to revert to $1 million each, and the GST tax exemption to $1.4 million, on Jan. 1, 2013.
  • The top rate for estate, gift, and GST taxes is 35% through 2012, and is scheduled to return to 55% on Jan. 1, 2013.
  • The gift tax annual exclusion is $13,000 per taxpayer ($26,000 per married couple) for each individual donee.
  • Wisconsin currently has no estate tax in place. Illinois’ current estate tax exemption is $2 million per taxpayer. Neither state imposes a gift or GST tax at this time.

Another unique aspect of the current federal law is that of “portability,” which means that a surviving spouse of any individual who dies in 2011 or 2012 may “use up” any amount of the deceased spouse’s unused $5 million estate tax exemption by making larger lifetime gifts. This feature is also set to expire at the end of 2012.

Asset values and interest rates remain low

As we are too often reminded, current economic conditions have led to low asset values and low interest rates. Depressing as this might be as we review personal statements, the combination of depressed asset values (think closely held business interests, real estate, and securities), historically low interest rates, and a record high gift tax exemption provides a window of opportunity for owners to transfer these assets to younger generations at a much lower tax cost.

This opportunity exists because tax liability on transferred assets (whether transferred during life or upon death) is largely determined by the fair market value of the asset at the time of transfer. In most cases, the lower this value, the lower the transfer tax liability on that asset. Because many assets have lost significant value over the last few years, taking simple steps to transfer an asset at its depressed value will likely result in the preservation of wealth.

Focus on the silver lining

Instead of brooding over low interest rates and depressed asset values, focus on the opportunities that this “perfect storm” presents – that is, the opportunity to shift wealth at an extremely low tax cost.

Taxpayers can achieve this result using estate-planning techniques that enable them to “freeze” the current value of an asset for transfer tax purposes, and shift any future appreciation of the asset to younger generations free of estate and gift tax. Some examples of these techniques (and their more familiar acronyms) are:

  • Annual exclusion gifts, either outright or in trust, for lower generations
  • Grantor Retained Annuity Trusts (GRATs)
  • Sales to Intentionally Defective Grantor Trusts (IDGTs)
  • Qualified Personal Residence Trusts (QPRTs)
  • Family Limited Partnerships (FLPs)

Of course, these techniques come with varying setup and administrative costs and should be discussed in detail with your tax advisor.

Fast action

The current estate and gift tax exemptions will be reduced to $1 million per taxpayer, and the GST tax exemption will be reduced to $1.4 million per taxpayer as of Jan. 1, 2013 (and possibly sooner, if rumors about proposed legislation are to be believed). In addition, the top gift, estate, and GST tax rate is scheduled to rise to a whopping 55%, and other commonly used estate planning techniques could be rather drastically restricted. This means that the current estate tax laws could very well be of the “limited time only” variety.

Finally, as asset values recover, the objective transfer tax benefits will be nowhere near as significant, and adopting a wait-and-see approach could end up as a missed opportunity. There may be no better time than right now to make gifts and explore whether certain estate planning techniques could benefit you.

Melissa Cover Selinger is an estate planning attorney with Whyte Hirschboeck Dudek S.C.

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