In yet another attack against the newly defined ”wealthy”, Obama has recently proposed tax code revisions to eliminate commonly used ways to shelter assets from estate taxes. If accepted, these tax changes will have MAJOR ramifications to the wealthy who otherwise could put assets into certain trusts and still benefit from them and – under present law – remove the assets transferred to the trust from their gross taxable estate for estate tax purposes. Specifically, the properly drafted trust allows the maker to pay income taxes on the income of the trust – per the Grantor Trust rules of the IRS Code – thus further reducing the maker’s gross taxable estate but the maker does not own the trust assets since the trust is irrevocable.
This technique is popular with clients because it does not use any part of a person’s lifetime gift tax exemption, which, if used, would reduce the person’s estate tax exemption. Instead, it simply uses an annual permissible gift amount – presently $13,000 per person – thus creating no gift taxes to shelter assets. With interest rates and asset values so low, this is an excellent tool! But Obama’s administration has caught onto it with their “wealth” hunt.
For example, one married couple I used this technique for had 13 beneficiaries (kids and grandkids) for their trust that I specifically drafted for them to take advantage of these tax code provisions. In December of last year the husband gifted (within the annual exclusion amount so no gift tax reporting) $169,000 to the trust ($13,000 times 13). His wife also gifted $169,000 for a total of $338,000. They both then gifted the same amounts in January of this year for a total of nontaxable gifts out of their estates of $676,000. Next they “sold” $5 million more to the trust taking back a promissory note at the prevailing very low interest rate for payment on the assets sold to the trust. Given the Grantor Trust rules, the clients pay all income taxes on income from the trust assets thus legally reducing their taxable estate and preserving more assets (of the trust) for their heirs. One trust, $5,676,000 permissibly sheltered, all family beneficiaries (with the additional protections against creditors, bankruptcy, divorce, spendthrift tendencies, etc.), AND they haven’t used any of their lifetime gift tax exemptions, leaving the full present $5.12 million estate tax exemption for EACH of them upon death. Without Congressional action, this $5.12 million exemption becomes only $1 million January 1, 2013! Keep in mind, the clients already have the typical AB/Bypass trusts sheltering twice the federal (and state) exemption amounts, which would be an additional $10,240,000 sheltered under present federal law. ALSO, the client can choose to keep gifting to the trust the annual exclusion amount of $13,000 per beneficiary (twice with spouse) for all subsequent years after this one to further reduce their gross taxable estate.
If Obama gets his way, we have only until the end of this year (2012) to duplicate such advance estate planning techniques!!