Gift Now and Avoid Estate Tax
If you have a net worth of $1M or more (or as a couple, $2M or more), and act now, you could forever remove the threat of estate tax. But if you don’t act by the end of the year, you will miss a historic opportunity.
The 2012 estate tax exclusion and gift tax exclusion are both $5,120,000 – way higher than they have ever been. But unless Congress and the President act, both will crash to $1M on January 1, 2013.
If you die with more than $1M after December 31, 2012, every dollar over $1M will be taxed at 55%. If you die with a $2M estate, your children will get $1,450,000 and the government will get $550,000.
But here’s your big chance: If you gift assets out of your estate before December 31, you can remove up to $5,120,000 (double that for married couples) from your taxable estate.
Don’t think this opportunity is only for rich people. If you have assets that will appreciate – like real estate, business interests, or other investments, you should take advantage of this historic opportunity to remove assets and all future appreciation from your taxable estate.
I know what you are thinking – ok, I get it, I should remove assets from my estate to avoid a future estate tax, but I need those assets. Can I gift them, but still benefit from them? The answer is YES.
A lifetime exemption trust, sometimes called a spousal lifetime access trust, can remove the asset from your estate and give you indirect access to the income. Here’s how it works:
* Create an irrevocable trust which names your spouse and children as beneficiaries.
* Your spouse can be the trustee and direct the investments and distributions.
* Transfer assets to it before the end of the year.
* Your spouse, as trustee, can distribute income from the trust to herself and deposit it in your joint account – which means you will have access to the trust income, even though you gifted away the assets.
Your spouse can also create a lifetime exemption trust which names you and your children as beneficiaries. However, this second trust must be drafted very carefully with different provisions than the first one to avoid the reciprocal trust doctrine. If the IRS determines the two trusts are identical, it will pull the gifted assets back into your estate.
This is just one of many gifting strategies available.
If you would like to leverage this historic gifting opportunity, you need to act now. Planning will most likely take a several weeks and time is running out.