Window Of Opportunity To Make $5.12 Million In Tax Free Gifts Closes Jan. 1, 2013

From a federal gift, estate and generation-skipping tax (GST) perspective, there is what we know, and what we don't know. We know that the current, generous federal estate, gift and GST framework gives each individual the ability to transfer $5.12 million in assets to certain descendants, including children, grandchildren and more remote generations, free from federal estate, gift and GST taxes. We also know that these historically high exemptions expire Jan. 1, 2013. On that date, the $5.12 million exemption drops to $1 Million, with any amount above that exemption being taxed at the much higher 55 percent tax rate, when compared to the current rate of 35 percent applied to amounts above the current $5.12 million exemption.

With federal politicians wrangling over future gift and estate tax policy, and November election outcomes hard to predict, the future is uncertain, but it is likely that the current framework will be more generous than whatever future framework is enacted by our federal government.

The following techniques may allow you to utilize the existing tax structure to minimize the overall tax impact on your estate. Please be aware that some of these opportunities may not be available after Dec. 31, 2012.

Installment Sale to Grantor Trusts: You, as grantor, form a "grantor trust" (meaning that you are still responsible for the income taxes associated with the trust during your lifetime). You then fund the trust with a gift, likely equal to your remaining gift exemption. Thereafter, you enter into a transaction with the trust to sell selected assets to the trust. In return, you receive back your initial gift, in the form of a down payment, and a promissory note for the remainder of the purchase price. The assets sold can often be transferred at a discount, and the promissory note can represent up to 90 percent of the value of the asset being transferred (e.g. a $4 million down payment can allow for a transfer of assets valued at $40 million). This allows you to take increased advantage of your gift tax exemption. This is known as a "leveraged" gift. While this technique does not serve to decrease the value of your estate (as you still hold a promissory note for the remaining value of the asset), it will remove future growth on the assets from your estate. Spousal Access Trusts: Many individuals would like to take advantage of the current gift tax environment, but are concerned with giving up access to their assets. To "have your...

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