Highlights

Use it or Lose it!

If Congress does not act by the end of 2012, the $5.12 million gift and estate tax exemptions are scheduled to return to $1 million on January 1, 2013.

With six months remaining in 2012, the time to act is NOW. Contact your Leonard, Street and Deinard attorney in June.

During 2012 we have an estate planning opportunity that we may not see again. In 2012, every individual may pass $5.12 million free of federal gift and estate tax to their children, grandchildren, or more remote descendants. Any transfer of wealth over $5.12 million per person is taxed at a 35% rate. Similarly, if transfers are made to grandchildren or more remote descendants, $5.12 million can be exempt from the additional generation-skipping tax (GST tax).

This opportunity to make gifts of this size will expire on January 1, 2013, unless Congress acts. In 2013, the federal estate, gift and GST tax exemptions are scheduled to revert to their lower 2001 levels—$1 million exemption from estate, gift and GST taxes.

To date, Minnesota has retained its $1 million exemption from estate tax, with no gift or GST tax.  

We recommend that our clients consider taking advantage of the 2012 law.  

Recommended 2012 Estate Planning Strategies

  1. Spousal Lifetime Access Trusts (SLATs)—A SLAT is an irrevocable trust that one spouse establishes for the primary benefit of the other spouse. The assets of the SLAT are removed from the estate of both spouses. SLAT assets are available to the beneficiary spouse and can ultimately be distributed to children and grandchildren without further estate, gift or GST tax.
  2. "Capped" Gifts to Children—This strategy involves making current lifetime gifts to children, outright or in trust, coupled with a "cap" in the parents' will or revocable trust on the children's inheritance at a certain dollar amount, with the balance passing estate-tax-free to a public charity, a donor advised fund or a family private foundation.
  3. Family Limited Partnerships—Family Limited Partnerships (FLPs) are a strategy that can leverage the available gift exemption and permit senior generations to continue to manage strategic family assets. If there is a sound business purpose for holding assets in a partnership with multiple family members as partners, and business formalities are followed, the use of FLPs may allow families to pass discounted non-controlling interests in the FLP to the next generation.
  4. Loans and Promissory Notes—Outstanding loans or promissory notes from children or trusts for children that were created in prior years can be forgiven currently using available gift tax exemption.
  5. Business Succession Planning—Giving non-voting stock or LLC interests in closely held businesses to children, or to trusts for their benefit, can be part of an overall business succession plan.
  6. Irrevocable Life Insurance Trusts (ILITs)—Trusts holding life insurance policies (ILITs) can be given cash assets now to provide for future premium payments by the ILIT. Life insurance owned in an ILIT may pass free of estate tax to the next generation.
  7. Low Interest Rates—Minimum interest rates are currently at all-time lows, which enables intra-family loans at attractive rates. A loan at a low interest rate to a trust can be a good way to use the difference between interest rates and investment performance to fund trusts such as ILITs.

Tax Rates and Exemptions

Click here to view the tables.