Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part III Planning Techniques and Strategies For Making A 2012 Gift

Over the past two days, I have discussed why the 2012 Gift Tax Planning Opportunity is a big deal and provided several ‘best fits’ for making a 2012 Gift.  Today, I conclude this series with some examples of planning techniques and strategies that can be used to maximize your 2012 gifts.  As with any estate planning strategy, most of these techniques require careful coordination with an estate planning attorney, accountant and other advisers to ensure that they are properly structured:

1)   Outright Gifts-The simplest gifting technique requires very little work and time to complete.  This can be accomplished by any properly executed form of transfer and also requires less setup fees than the other techniques listed below.

There are several downsides to outright gifts.  First, assets gifted directly to a beneficiary remain exposed to the claims of creditors.  Second, if the gift is being made to a minor or an adult that is ill prepared to handle such a large-scale gift, the transferred assets can be wasted.  Finally, while making such a gift removes it from the donor’s taxable estate, it will be included in the beneficiary’s estate.

2)   Gifts to Trust-As an alternative, a gift to a trust may be more appropriate if there are concerns about creditor claims, taxes or waste.  An irrevocable trust can hold the gifted property outside the beneficiary’s taxable estate and the assets can be distributed to beneficiaries at the discretion of the named trustees.  Setting up a trust will require additional fees for set up and administration that are not required of a direct gift.  A suitable trustee will also be required that fits the grantor’s specifications.

3)   Grantor Retained Annuity Trust (GRAT)-Several of the more complicated trust arrangements could be useful for 2012.  A GRAT, for example, can be used to pass property to beneficiaries while retaining annuity for the donor for a set period of years.  Depending on the donor’s goals, the GRAT can be structured to have minimal annuity payments or as a means to ‘freeze’ the value of the donor’s estate.

4)   Intentionally Defective Grantor Trust (IDGT)-Using an IDGT can provide several benefits.  First, it can provide a way to remove an appreciating asset from a donor’s estate.   Second, if a portion of the transferred assets are transferred in exchange for a promissory note, the donor can retain an income stream through the repayment of interest and the principal.  Finally, because IDGTs are taxed to the Grantor of the Trust rather than the Trust for income tax purposes, the donor can further reduce the size of his estate while increasing the value of the property passing to their beneficiaries.

5)   Qualified Personal Residence Trust (QPRT)-Individuals who own their primary residences may utilize the 2012 Gift by transferring their residence to a QPRT.  The donor retains the exclusive right to live in the residence for a set period of years.  At the end of that period, ownership transfers to the remainder beneficiaries of the trust.  The donor can still live in the residence if they pay rent to the remainder beneficiaries.  The longer the term of the trust, the smaller the gift would be.  With the larger exemption in 2012, donors can set up a QPRT with a relatively short term to maximize their gifts.

6)   Family Limited Partnerships/LLCs-If a donor wishes to pool several assets into a single entity, they can utilize a family limited partnership or LLC as a means to centralize the management of certain assets.  A gift of an LLC or FLP interest can receive a valuation discount that would not be available to transfers of the underlying assets.

7)   Intrafamily Loan Forgiveness-2012 provides individuals and families to consider removing outstanding loans from a donor’s taxable estate.  Rather than continue to receive payments on a loan, the holder of a promissory note or other debt instrument can forgive all or a portion of the outstanding debt by making a gift of the forgiven amount.

8)   Funding a large life insurance policy-Donors can utilize all or a portion of a 2012 gift to fund a large life insurance policy.  If the beneficiaries do not need immediate access to the funds, this may be an attractive option to provide for a later benefit.  To fully protect the gift from any taxation, the insurance policy should be purchased by an irrevocable life insurance trust (ILIT).

As we draw closer to the so-called “Taxmageddon,”  the opportunity to fully take advantage of the current tax rates and exemptions shrinks.  Many of the techniques discussed above require time to set up and fund, so for those looking to make a 2012 Gift, time is not on your side.  The time to start planning your 2012 Gifts is now.

Please contact info@levyestatelaw.com for more information about 2012 Gift Tax Planning.

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Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part II Best Fits For “Supersize” Gifts

As the window for making large-scale gifts shrinks each day, many individuals and families will be encouraged by their attorneys and other advisers to consider taking advantage of the 2012 Gift Tax Planning Opportunity.  While this unique event could be a windfall for many people, there are certain situations where utilizing the current gift tax exemption and gift tax rates are most beneficial to the donors.

Below is a non-exhaustive list of some of the ‘best fits’ for making a 2012 Gift:

1)    Individuals with a taxable estate at or above the current Federal Estate Tax Exemption-The current federal estate tax exemption, as with the gift tax exemption, is $5.12 million.  And just as the gift tax exemption will expire on December 31st, the federal estate tax exemption will reduce to $1 million 2013.

Given the likelihood that the estate tax exemption will be reduced, individuals who may have a taxable estate if they die in 2012 would be wise to consider gifting a portion of their estate before year’s end.  By doing so, they can increase the portion of their estate that passes to their heirs free of federal estate tax.

2)    Individuals with a taxable estate at or above their current State Estate Tax Exemption-Residents of Connecticut, New Jersey and New York face lower estate tax exemptions than residents of most other states in the U.S.  Even those individuals whose estates will likely pass free of federal estate tax could have a state estate tax imposed which would similarly reduce the value of the property passing to their heirs.  Making a 2012 Gift is especially useful in reducing potential state estate tax exposure because none of the tri-state area states impose a state specific gift tax.

3)    Family Business owners looking to transition their businesses to their family-One of the many reasons that business succession planning fails is that the incoming owners may be unable to pay the current owners the full value of the companies they are purchasing.  In a family business, a senior family member willing to transfer some or all of their business to their successors as a gift can avoid this hurdle while assuring that the business continues uninterrupted.  For those concerned about a loss of income or not receiving sufficient assets to live off of, using a planning technique like a GRAT or a sale to a defective grantor trust may allow the senior family member to be more generous with their gifting.

4)    Real Estate Owners-In some areas of the country, real estate have begun to rebound.  Nevertheless, the values are still significantly lower than they were prior to the 2008 Financial Crisis.  Gifting a second home or investment property this year could be more tax efficient than transferring it when values increase.  In addition, individuals interested in gifting their primary residence can utilize a technique known as a qualified personal residence trust (QPRT) to transfer ownership of the property while retaining the right to live in the residence for a set period of years.

5)    Individuals with highly appreciating or income producing property-Property likely to increase in value over the next few years can either be gifted outright or to a trust using today’s values.  This allows the beneficiary of the gift to receive the full benefit of the appreciation while reducing the donor’s taxable estate.  Alternatively, by utilizing planning techniques like a GRAT or IDGT, the donor can freeze the value of their taxable estate while also providing their beneficiaries with a significant long-term benefit.  This is also true of property that produces significant income.

6)    Same Sex Married Couples and Domestic Partners-Without the benefit of a marital deduction at the federal level (New York same sex married couples) or at both state and federal levels (domestic partners), non-traditional couples are at a distinct transfer tax disadvantage.  In addition, whereas gifts between married couples are consider non-taxable events, gifts between same sex married couples and domestic partners are.  Fully utilizing the 2012 Gift opportunity may be a unique opportunity for these couples to make tax-free gifts to one and other.

7)    Individuals who have made intra-family loans-The current low interest rate environment have encouraged many family members to make loans to their junior family members.  However, if the junior family member does not pay back the principal of these loans and interest, the lender is deemed to have made a gift.  If the lender does not need or want the money back, a 2012 Gift can be used to forgive a portion or the entire loan amount.

Other individuals and situations may also be appropriate for 2012 Gifts.  Tomorrow, I will go over several planning techniques that can be used to maximize the benefit of making a 2012 Gift.

Please contact info@levyestatelaw.com for more information about 2012 Gifts.

Real and Adequate Considerations: Estate Planning for Real Estate

Real estate is one of the most common types of property disposed of by an estate plan.  For many individuals and families, a house or other real property will be one of the most valuable assets that they will transfer during their lifetimes or at their death.  In order to achieve the best results, certain aspects of the transfer must be considered from the initial planning stages through the completion of the transfer.

The following are the most important factors to consider when planning a transfer of real property:

1. Consider How The Property Is Titled-Property owned by more than one person can be titled in several ways, either with a right of survivorship or without one.  Property titled as “tenancy by the entirety” (which is available only to married couples) or “joint tenancy” have a rights of survivorship and will pass outside of probate to the surviving owner.  Property owned as “tenancy in common” property have no rights of survivorship and passes through the probate process.  Ensuring that jointly owned property can pass outside of the probate process is an easy way to avoid the delay and cost related to property passing through probate.

2. Consider How the Property Is Owned-The simplest form of property ownership is outright ownership.  However, under some circumstances, it may be advantageous to consider the use of a trust or business entity such as an LLC or family limited partnership to own real estate.

Property owned by a trust or business entity can be shielded from certain forms of creditor claims or limit the liability of its owners.  In addition, the use of a trust or business entity may allow the property to be discounted for gift and estate tax purposes.  Finally, for larger families, a trust or business entity may allow for a centralized management and administration of family property.

Owners of condominiums and coops should consult with their respective board of directors before transferring property to a trust or a business entity.  Some boards prohibit the use of one or both of these ownership forms.

3. Consider When A Transfer Should Be Made-The decision of when a real estate transfer will take place requires considering several things.  The age of the transferor, the type of real estate being transferred and whether the transferor wishes to retain an interest in the property for a term of years should all be factored into the decision making process.

Additionally, the cost basis of the property should be determined.  A Gift of real estate during the transferor’s lifetime will result in the transferee assuming the transferor’s basis.   If the property has appreciated significantly since the transferor acquired the property, the transferee will be assuming a large capital gain when the property is ultimately sold.  If the property is transferred upon the transferor’s death, the cost basis receives a step up to the value of the property at the transferor’s date of death or an alternative valuation date six months after the date of death, whichever value is lower.

4. Consider Transfer Taxes-In addition to a potential capital gains tax, the transfer of real estate may subject the transferor or his or her estate to gift or estate tax liability.  Before making a transfer or planning a transfer, owners of real estate should review their financial records with an accountant, estate planning attorney or other financial professional to determine how much of their lifetime gift tax /estate tax exemption has been used.  If the proposed transfer would result in a tax liability, the use of  estate planning instrument such as a qualified personal residence trust (QPRT), an LLC or a family limited partnership should be considered to reduce the value of the transfer for gift or estate tax purposes.

5. Consider Where the Property is Located-Unlike intangible assets such as cash, stocks and bonds, the physical location of real estate will dictate which state’s probate laws will apply.  If an individual owns real estate in one or more states or countries outside of New York, they may be required to file a secondary probate proceeding known as ancillary probate.  This may create an additional burden on the family of a deceased individual at a time when they will already be stretched thin.

Proper titling of the property can protect joint property if a right of survivorship is included.  In other instances, it may be beneficial to transfer the property to a revocable trust or another trust or entity to ensure that the property(ies) will not be subject to ancillary probate.

As with other forms of property, proper planning with real estate can be the difference between a successful transfer and one that is plagued with delay, additional taxes and other complications.  It is essential to take the above-mentioned factors into consideration before preparing an estate plan for your real estate.

Please contact info@levyestatelaw.com for more information about estate planning for real estate.