TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, November 12, 2012

Estate & Gift Tax News

This document describes the economic modeling that the staff of the Joint Committee on Taxation ... undertakes to estimate the Federal revenue effects of estate and gift tax proposals. ... The remainder of this document is organized as follows. Because the estate and gift tax laws are complex and have been in flux for more than a decade, the first section lays out a brief description of estate and gift tax law as it presently stands and its recent history. The next section describes the economic issues and the model used to address them. The third section illustrates the modeling techniques described in the previous section by describing the Joint Committee staff’s estimate of the President’s fiscal year 2013 estate and gift budget proposal. Finally, the appendix contains information related to the distribution of estate tax liabilities under different estate tax policies.

Its looming expiration has left many people of means scrambling to use what has been billed as a once-in-a-lifetime way to give tremendous amounts of money to heirs tax-free before death — as opposed to the alternative, after death via the estate tax exemption. ...

For the truly wealthy, the tax benefits can be considerable. Consider what [Carol Kroch, head of wealth and financial planning at Wilmington Trust] calculated for someone with $15 million. She assumed that the person gave $5 million to a dynasty trust — meaning a trust that lasts for at least 100 years — and kept the other $10 million in his own name. Ms. Kroch then assumed a 6% rate of return over 25 years and an estate tax of 55% with a $1 million exemption — what it will be next year unless Congress acts.

The $5 million in the trust would grow to $21.45 million, while the $10 million would become $42.9 million — $26 million of which would go to estate taxes. If the person kept the entire $15 million, it would grow to $64.37 million over the same period, but the estate tax would be $35 million. Put simply, using the gift tax exemption this year would save that person’s estate $9 million in taxes.

But to get that savings, people have to part with the money in less than two months, and that is not easy. ...

While Congress or the IRS could indeed confound the plans being made this year, a more realistic concern might be people who try to use various legal structures to push for even more than they are being given.

One of these is a strategy called a spousal access trust. It can be designed to let one spouse give $5 million to the other spouse and vice versa, so that they can still have access to the money if needed. To be done correctly, though, the trusts need to be different or the IRS could disallow them as “mirror trusts” and say that the transferred money never left the original estate.

A better, safer approach may be smaller, outright gifts that people can afford and do not run the risk of being audited later by the IRS.

The rush is on to give away assets to family members before the $5.12 million gift-tax exemption reverts to $1 million at year-end. But investors need to take care that their tax-saving strategies don't backfire. ...

But before you give away the vacation compound or the family business, it is important to step back and take a look at potential pitfalls. Here are some strategies for avoiding gift-making mistakes:

  • Maxing out
  • Real estate
  • The right trust
  • Family businesses

[P]ortability is one of many tax-law provisions scheduled to expire at the end of 2012. But Congress appears likely to extend it beyond this year. Although many estate-tax issues are highly controversial, this one enjoys bipartisan support. "I do expect portability to survive," says Michael Graetz, a professor at Columbia Law School in New York.

Forbes:  Grab the $5M Gift and estate Tax Perk: It's Gone in 2013, by Robert W. Wood:

[O]ne thing is as certain as death and taxes. Between now and December 31, 2012, every couple with say $2M or more of assets should consider this before it’s too late.

(Hat Tip: Mike Talbert.)

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