2012 Estate Planning. Martin Inc. Shenkman

      Save Future Generations’ Estate Tax

      Should all the proposed negative transfer tax changes be enacted, and if you do not aggressively plan now to shift significant value and future growth into GST exempt perpetual dynastic trusts, you will likely cause additional and unnecessary discomfort and stress when planning for yourself in the future. For instance, when your heirs are ready to do their own planning, the law might reflect only a $1 million gift tax exemption, allow no discounts, no perpetual GST exemption allocations, no grantor trusts, and so on. With so many advantageous planning tools either eliminated or otherwise restricted, they may be hard-pressed to plan effectively with respect to their own wealth and that inherited from their parents or other loved ones.

      Incur Gift Tax at Today’s Low 35 Percent Rate

      While most people will be loath to consider this idea, for those of advanced years or in poor health, it may prove beneficial for select high net worth people to make significant gifts in 2012 such that a gift tax would be incurred. This gift tax will be at the current 35 percent rate. This likely will prove favorable when compared to the 45 percent rate that President Obama has proposed and even more so when compared to the 55 percent tax rate scheduled to take effect in 2013 if Congress does not act. There is obvious risk with this type of extreme gift planning in that the gift tax rate may not rise in the future and the hoped for arbitrage may never be realized. Nevertheless, these lifetime gifts may still prove beneficial because, if made more than three years before death, the gift tax paid will be removed from the estate of the person who made the gift.

      This is similar to the dilemma many clients faced in 2010 when the risk of such rate increases becoming effective in 2011 were a topic of discussion. Because the rates never rose, the few clients that may have undertaken 2010 taxable gifts likely endeavored to unwind them in 2011.

      The different manner in which the gift tax (tax exclusive) and the estate tax (tax inclusive) are calculated favors the net impact of incurring a gift tax over an estate tax.

      Protect Assets

      Favorable gift tax rules make asset protection planning less complex, more cost efficient, and safer. It is that simple. That may all change in 2013. That risk makes it imperative that anyone concerned about asset protection planning act now, not later. Even if the potentially adverse estate tax changes are not a concern for you (e.g., you are young and not particularly concerned with the impact of estate taxes, or you are comfortable simply using life insurance to fund future estate tax costs), the impact on asset protection options might be critical. Gifting assets to a self-settled domestic asset protection trust (DAPT) today may protect those assets from a future lawsuit and divorce. Selling key assets to a trust may also protect those particular assets from lawsuit and divorce. It will not, however, protect the initial value transferred by sale since the note generated by the sale will be an asset of yours, taxable in your estate, and susceptible to the reach of a claimant or divorcing spouse. However, the terms of the note, including the interest rate, may make the note worth little to any creditor, including your spouse in the event of a divorce. For example, a younger taxpayer might take a note in exchange for the property. That note might not be payable for 30 or more years with very low annual interest—right now, such a note would likely bear interest at less than 2.5 percent a year and, if the note were for only nine years, the rate would be under 1 percent annually.

      With a $5.12 million exemption, you may be able to gift assets to a self-settled, completed gift DAPT without incurring gift tax and obtain meaningful asset protection. However, if the gift tax exemption declines to $1 million, this type of planning could become more complex and costly. You would, for example, have to fund a family limited partnership, obtain a discount appraisal, gift non-FLP assets, then consummate a note sale for additional assets. If grantor trust status or discounts are eliminated, even that planning may be less productive, or impractical.

      For larger transfers above the $5.12 million exemption, the elimination of grantor trust status or the restriction or elimination of valuation discounts may render a note sale impractical. Planning now, before adverse gift tax changes, may be the most crucial asset protection step you ever take.

      Better Than a Prenuptial

      Those of you contemplating marriage may benefit by gifting and or selling assets to a self-settled, or other form of irrevocable trust before your marriage. If you do not own the assets when the wedding occurs, they will be safer than even the best-crafted prenuptial agreement can assure. This is not to suggest that a good prenuptial agreement isn’t appropriate as well. To the contrary, a prenuptial agreement may also be used, and should disclose the existence of the self-settled trust funded prior to the marriage. The prenuptial agreement alone cannot possibly afford the same asset protection that an irrevocable transfer made prior to the marriage, and disclosed to the soon-to-be spouse, will afford.

      Better Than a Postnuptial

      As discussed above, gifting assets to a self-settled trust today may protect those assets from a future marriage ending in divorce. But what if you are already married and, as is so often the case, failed to heed the advice of obtaining a prenuptial agreement? Well, perhaps your parent, or some other benefactor, can create a beneficiary defective irrevocable trust (BDIT) for you. You can then sell assets to the BDIT, without improperly dissipating marital assets, so long as a note is received in exchange that is equal to the fair value of the assets being sold to the BDIT. The sale can then permit a family business or other asset to grow outside your taxable estate and safeguard that asset from the potential ravages of a future divorce.

      BDITs are discussed and explained in greater detail in Chapter 5. Some unique 2012 applications of this planning technique are also discussed.

      CAUTIONS AND CAVEATS

      While repeating the obvious, at the time of this writing no one can predict what the future of the tax laws will be. State laws (tax and otherwise) differ rather significantly. Everyone’s family and financial circumstances are unique—everyone’s perspectives and attitude on estate planning are different. Some people are almost phobic and as a result paralyzed by any planning strategy that is complex. Others are razor focused on saving taxes regardless of the complexity involved. Perhaps, more than ever before, you need to clearly identify and explain to your professional advisers your particular circumstances and feelings about planning.

      Cautions for Professional Advisers

      Many of the ideas, sample clauses, and other material included in this book may not be appropriate for all clients. Each idea or suggestion must be tailored to fit the specific client needs, circumstances, and temperament. Generically applying the “standard” advice at the significant levels that many 2012 wealth transfers will take could prove disastrous.

      Do all practitioners have an obligation to inform all clients of the 2012 planning opportunities? If a practitioner fails to notify clients of these planning opportunities and the client misses the window of opportunity, has the practitioner violated the standards of practice? Will the client’s heirs be able to sue the practitioner for failing to communicate what might be the limited time period for which current planning opportunities remain? We believe that no practitioner should have any liability for not informing clients of the 2012 planning opportunities unless he or she has promised a client to do so. Media attention given to the potential for adverse tax law change has been so prevalent that no one should realistically be able to claim that he or she was unaware of the situation.

      However, not communicating with clients is clearly not good business planning for the professional. Practitioners should endeavor to inform every client (whether active or inactive) to evaluate 2012 planning opportunities while it is still feasible to do so. There is still ample time to notify clients via a mailing, newsletter, phone calls, or through other appropriate communications. Ideally, the communication