David Heilich, Principal, Brown Smith Wallace LLC
The remainder of 2012 presents a significant opportunity to gift assets and take advantage of unprecedented tax benefits. With the increase in the gift tax and generation-skipping tax (GST) exemptions to $5,120,000, wealthy individuals should be having serious discussions about whether it makes sense to take advantage of this window of opportunity.
There’s no time like right now to make small to large gifts, without shouldering a gift tax burden, and time is of the essence because the window may be closing. The gift and GST exemptions are set to expire on Dec. 31, 2012 — and no one is sure what 2013 and beyond hold, given the uncertainty of an election year. It is possible that gifting opportunities at this level will not be available after the New Year.
“We know what the law is today and what we expect the law to be for the balance of 2012, but next year, after the election, today’s gifting opportunities could go away,” says David Heilich, principal, tax services, Brown Smith Wallace, St. Louis, Mo.
Smart Business spoke with Heilich about estate tax planning tools that wealthy individuals should consider before the increased exemptions potentially expire at year end.
What gifting tools are advantageous for wealthy individuals right now?
In 2011, there was an increase in the gift exemption from $1 million to $5 million, which was adjusted for inflation in 2012 to $5,120,000. This is a significant increase, since in 2010, the gift limitation was $1 million.
Additionally, there is the GST exemption of $5,120,000 that allows an individual to transfer wealth to generations beyond children, to grandchildren and future generations. Essentially, the GST exemption protects those assets for a longer period of time before the IRS can assess an estate transfer tax. The ability to make large gifts without paying gift tax to a trust for the benefit of future generations is a significant opportunity that could expire after Dec. 31, 2012. After this point, the exemption will ‘sunset’ because the Tax Reform Act of 2010 only changed the law for 2010-12, and the estate, gift and GST tax laws could revert back to the 2001 law of $1 million estate, gift and GST exemptions with a maximum tax rate of 55 percent, compared to today’s 35 percent.
Who should consider taking advantage of gifting before year end?
Anyone with assets worth $5 million or more, depending on their age and type of assets, should be having serious discussions about their current estate and their motivations and desires for their wealth. Other factors to take into account are potential inheritances, small business appreciation, earnings potential and charitable intentions. Consider both your net worth today and your potential net worth in the future. Make sure you know how to best use today’s estate and gift tax vehicles.
What steps are necessary to execute a gift before the close of 2012?
The critical first step is — don’t wait to act. It’s not too late, but time is of the essence with estate planning. It’s not an overnight process, although it is possible to accelerate planning in order to get gifts in place before Dec. 31, 2012.
When you meet with a qualified estate planning adviser, he or she will first provide education about the laws. From there, a snapshot of the net worth of the estate is gathered, boiling it down to a one-page summary of assets and liabilities. Many times, individuals do not realize how much they are really worth until going through this exercise.
During this time, the adviser will review the current estate plan and the assets of the estate. It is important to understand all trusts (revocable and irrevocable) and entities that are in place, along with a review of any current life insurance policies, and to make sure your health care directives, durable powers of attorney and beneficiary designations are in line with your wishes.
After you create an estate plan, it is important to review your estate plan annually, as well as upon any important ‘life events,’ and update the plan as necessary. This is all part of the process of determining how and what to gift before the end of 2012 and creating an estate plan that accomplishes your goals and desires.
What is an example of how gifting can work if planned properly?
For those who have not taken full advantage of their life exemptions and for whom it makes sense to make a lifetime gift, a wise gifting vehicle is an Irrevocable Trust. This vehicle allows the client to make gifts to a trust and allocate the GST exemption.
In essence, there are two pieces to the gifting puzzle: a gift to the trust, and if the trust includes grandchildren, the potential to apply the GST tax exemption when filing the gift tax return. Ultimately, this means the client is able to transfer the assets today without paying current gift tax and move all of the appreciation out of their estate. If the succeeding generation leaves the assets in trust, those trust assets could potentially be free of estate tax in perpetuity. However, keep in mind that this is just an example of how gifting can work, and it is important to understand a client’s assets and goals before creating a plan.
What other gifting tools can relieve tax burdens at this time?
Another component of gifting is the annual exclusion — think of this as a ‘freebie’ from the IRS. You can give $13,000 individually to anyone (and married couples who consent to gift split can gift up to $26,000 to anyone). The annual exclusion gifts are not added back to your estate and are a simple way to transfer assets to the next generation.
No one knows what 2013 will bring, but we do know that right now the window is open, and it is a great time to review and update your estate plan and consider taking advantage of these unprecedented opportunities.
David Heilich is Principal, Tax Services at Brown Smith Wallace in St. Louis, Mo. Reach him at [email protected] or (314) 983-1273.
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