Time is running out. We all knew it would happen. Almost two years ago, Congress passed TRA 2010, which extended EGTRRA (the “Bush tax cuts”) for two years. Yes, that extension is almost up. TRA 2010 will sunset at the stroke of midnight on December 31, 2012. As the ball drops in Times Square, so will our clients’ applicable exclusions.
Currently, the applicable exclusion for both gift and estate tax purposes is $5.12 million. However, at 12:01 a.m. on January 1, 2013, it will drop to $1 million. There is a way for clients to capture the benefit of the current gift tax: use it now. Not everyone will want to give away their millions, just to save some taxes, though. But, what if the client gave the money to a trust for their spouse? The spouse could even be the trustee and make distributions to himself or herself, subject to an ascertainable standard (like health, education, maintenance, and support). The assets would be available to the spouse, but not included in his or her estate.
Since no marital deduction will be sought, the income could even be accumulated to maximize the transfer tax savings. The trust also could have the children or others as beneficiaries, as well. This “Family and Spouse Gifting Trust” can be used to “lock in” the current applicable exclusion available to the client.
The clients could even set up trusts for each other, as long as they were careful to vary the terms sufficiently to avoid the “reciprocal trust doctrine.” In this way, the couple could shelter up to $10.24 million.
Once nice thing about this strategy is that a couple need not be married to utilize it. Since a marital deduction is not part of this strategy, a couple in a long-term, stable relationship could choose to do this even though they are not married. As a result, this could be a great strategy for same-sex couples (whose marriage is not recognized under federal law) or unmarried couples, as well as traditional couples.
It is possible that these gifts will be considered upon the death of the donor post-TRA 2010 sunset. This “clawback” is seen as very unlikely by most commentators. In any event, the strategy definitely would be successful in removing the growth of the assets in the trust from the taxable estates of the couple.
However, there is a limited time for your clients to act. They must meet with you, you have to draft the trust, and they have to make the completed gift prior to midnight on December 31st. So, it is best to alert them to this possibility as soon as possible. Otherwise, you are likely to be burning the midnight oil meeting with clients in December!
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555