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Gift and Estate Tax Planning Part 2

October 11, 2012

I received some calls with comments about my previous blog on the pending expiration of the $5,120,000 exemption.  I indicated that those with assets less than $8,000,000 should not be too concerned about it. These calls made reference to some things that should be considered and some additional strategies and are included here.  Note that many of these ideas are not restricted to pre-2012 year end but with estate planning, the sooner, the better, especially with the threat of imminent changes. Many of these ideas are not limited to the ultra-wealthy.

  • If you are a resident of a state with state estate taxes, such as NJ and NY, then utilizing the gift exemption will save future state estate taxes as long as the estate is distributed to lineal descendants.
  • Gifts exceeding the exemption amount will be subject to gift tax that will be paid.  The gift tax payment will be lower than the estate tax on that same amount and will be cash that will be removed from your estate providing a double benefit.  Note that if the donor dies within three years of paying the gift tax, that tax payment will be added back to your taxable estate and will be subject to estate tax.  This benefit works if you live three years; however, the income earned on the gift tax payment will still be removed from your estate.
  • Life insurance purchased directly by an irrevocable life insurance trust will not be included in the estate when the insured dies.  For policies transferred into the trust, the proceeds will be included in the taxable estate if the insured dies within three years of the policy transfer.
  • An alternative using the life insurance trust is to make a gift of high cash flow producing S corporation stock or LLC interests and then have the trust use such cash flow to make life insurance premium payments.  In this manner, annual exclusions could be used for other gifts including support of grown children.  If the trust is a grantor trust, the donor is taxed on the income from the S corporation or LLC which will represent a tax free gift to the trust.
  • People with large IRAs at advanced ages should consider paying the income taxes on a Roth IRA conversion. This will remove the tax money from your estate and allow your beneficiaries to receive tax free Roth IRA distributions. Note that the Roth IRA will be included in your taxable estate.
  • An alternative to converting your IRA to a Roth IRA is to name some charities as beneficiaries when you die.  This will allow the funds to pass income and estate tax free to your favorite charities.
  • Another alternative to naming charities is setting up a family charitable foundation or donor advised fund and making that the recipient of the IRA permitting your heirs to distribute the money to charities they support.  There are other variations on this theme that also should be explored if you are interested.
  • If you typically make annual gifts to family members, consider gifting cash, bonds or high basis stocks.  This is because the recipient will assume your basis.  If you make a gift of low basis stocks, they will be liable for the capital gains tax when they sell the securities.  An alternative is to make gifts of low basis stocks to those in a zero income tax bracket who will immediately sell the stock in 2012 only. This will not work for kiddie tax children.
  • Gifts to trusts allow the time, manner and purposes of distributions to be controlled based upon terms in the trust.  It also provides asset protection for your beneficiaries.
  • Succession planning with family members can take advantage of this year’s larger exemptions, and you should consider an acceleration if this is something you are thinking of doing in the near future.
  • Low interest intra family loans and mortgages offer many ways of transferring wealth gift or GST tax free.
  • Testamentary or intervivos Charity Lead Unitrusts can work wonders in providing a steady cash flow to charities and the ultimate transfer of the assets to your family beneficiaries at a discount for gift tax purposes.

These are some ideas of what can be done to reduce estate taxes.  It is not a complete list, but provides a range of strategies that can, hopefully, get you thinking…and acting.


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