By Stacey Jarrett, CPA
Manager, Tax Services
We just recently ended estate planning awareness week. Which begs the question: when was the last time you thought about your personal estate plan? For most of us this tends to be one of those items on our lengthy to-do list that we keep pushing off.
There are a few opportunities currently available that may be worth considering. Most of us are aware of the annual gift tax exclusion which allows individuals to give up to $13,000 to each person of their choosing tax-free on an annual basis. However, were you also aware that through the end of 2012 the federal estate and gift tax laws allow for a $5 million life-time exemption – meaning it could be possible to transfer up to $5 million without paying tax? Barring any future action by Congress, this exemption will revert back to the 2001 level of $1 million beginning January 1, 2013.
Removing assets from your estate does not mean you have to give up $5 million today to an underage or irresponsible beneficiary. Many estate planning vehicles exist that can legally remove these assets from your estate while allowing you to retain some control.
Gifting assets to an irrevocable trust for the benefit of your spouse, children, grandchildren, etc. will remove the assets from your estate and also allow for the growth of those assets to be free of estate taxes.
Similarly, a credit shelter trust can be set up to maximize both spouses’ exemptions by shifting an amount equal to the exemption to the spouse upon the taxpayer’s death. Dynasty trusts are available to remove the assets from the estate while preserving them for future generations. If set up correctly, gifts can qualify for the gift tax exclusion.
Life insurance is a common estate planning tool; establishing a life insurance trust can remove the principal assets from the grantor’s estate. If you don’t want to lose cash flow from transferring assets out of your estate, another option might be grantor retained trusts (GRAT or GRUT), which provide for cash flow to the grantor. Today’s low interest rates also make a grantor retained annuity trust (GRAT) especially advantageous. These are just a few of the options available.
A drawback could exist if Congress decides to allow the reversion back to 2001 levels of $1 million and the 55 percent tax rate. There is always the possibility Congress could decide to enact a “clawback” provision subjecting any prior gifts in excess of the lifetime exemption to be subject to tax. This pitfall is not certain and would seem unlikely, but it will not be known until future legislation is passed.
The question of whether or not to take advantage of any of these estate planning opportunities depends on each taxpayer’s situation. Factors such as net worth, willingness to act without knowing future laws, the amount of discretionary assets and desire to retain control should all be considered. We would be happy to have a conversation to determine what makes the most sense to you.
For additional information, please contact Stacey Jarrett at 317-613-7848 or [email protected].