Gifting Opportunities in 2011 and 2012
Posted 9-13-2011 | By Katie Haskins | Download Article
The 2010 Tax Act made significant changes to the federal gift tax and estate tax laws for 2011 and 2012. For 2011 and 2012 only, the federal gift, estate and generation skipping transfer tax exemptions were all increased to $5 million. The maximum federal gift and estate tax rate on gifts and estates greater than $5 million was reduced to 35 percent and the concept of federal estate tax portability* was introduced. With the federal lifetime gifting exemption at an all time high, gifting should be part of your estate tax planning discussions.
Using your lifetime gift tax exemption has its advantages. From a tax perspective, lifetime gifting is beneficial since it removes assets from your estate at their present value instead of transferring assets at your death at an appreciated value. From a non-tax perspective, gifting allows you to experience your heirs enjoying the property.
With the increased exemption amount and decreased tax rate, there are many gifting techniques to consider. Direct gifts of cash or property and the forgiveness of debt to related parties are easy ways to remove assets from your estate. Gifting to a grantor trust enables you to pay the income tax liability of the grantor trust, which reduces your estate without the imposition of additional gift tax. If you are interested in life insurance, consider pre-funding an Irrevocable Life Insurance Trust (ILIT). You can make a gift to an ILIT using a portion or all of your gift tax exemption. Then, upon your death, the insurance proceeds are estate tax free.
Another gifting technique available is giving a gift to your spouse using a non-Qualified Terminable Interest Property (non-QTIP) trust. For example, if a husband makes a $5 million cash gift to a non-QTIP trust in 2011, he will use his entire lifetime gifting exemption. The entire $5 million is out of the husband's estate and, depending on the trust language, should be out of his wife's estate. This protects the assets from being taxed by estate tax on future appreciation at the husband's or wife's death. The trust can give the wife the right to receive income and principal during her lifetime without it being included in her estate. If the marriage is one built on mutual understanding, love, and trust, the husband may benefit from the distributions the wife receives from the trust as well.
If the wife makes a similar $5 million gift to a non-QTIP trust in 2011 and gives her husband the right to income and principal (assuming the trusts are not reciprocal), as a couple they have frozen $10 million of assets from being taxed by estate tax on future appreciation. They also have retained the ability to receive income and principal from each other's trusts.
If the marriage is not built on mutual understanding, love, or trust, try to convince your spouse to set up a non-QTIP trust for your benefit.
The gifting techniques mentioned above are just a few of the many ways to transfer wealth.
For more information, please contact Katie Haskins, MBT, CPA, at khaskins@hlbtr.com or 651-407-5883.
*Portability allows the surviving spouse to use the pre-deceased spouse's unused gift and estate tax exemption. Prior to 2011, the exemption of the first spouse to die would have been lost if that spouse did not have sufficient assets in his/her estate to utilize the exemption or if that spouse's estate passed to the surviving spouse. At this time Minnesota has not amended its estate tax laws to coincide with the federal laws. The Minnesota estate tax exemption remains at $1 million with no portability option.