The Tax Relief Act of 2010 (TRA 2010) continued the policy of keeping the tax code as temporary as possible. The patch-and-wait nature of our federal tax system has been extended until the end of 2012, putting any long-term tax strategy on hold. However, one aspect of the estate tax that merits our attention is for long-term tax savings.
TRA 2010 reunified the gift exemptions and the generations skipping transfer tax (GST) with the estate tax. This means that lifetime gifts and GST exemptions are the same $5 million as the federal estate tax until December 31, 2011. This creates an opportunity to move substantial amounts of wealth out of a taxable estate during the next two tax years.
Outright gifts or deposits into an irrevocable trust are one way to take advantage of this exemption. There are also many other tools that can provide leverage to maximize the $5 million exemption. Low interest rates and lower asset values resulting from the 2008 economic downturn create an ideal environment to consider family limited partnerships, grantor retained annuity trusts, charitable lead annuities, self-canceling installment notes, private annuities, freeze partnerships, dynasty trusts and intra-family loans.
Care must be exercised when choosing which assets to transfer. Gifted assets do not receive a step-up in cost basis. Highly appreciated assets are best suited for charitable gifts. It may even be more tax efficient to retain these assets in the estate in order to receive the step-up in basis at death.
Planning gifts is a complex issue and using the techniques mentioned in this article requires a high degree of expertise. The transactions must be irrevocable or they will not be considered completed gifts. Only completed gifts avoid estate tax. You should consult a skilled wealth manager and estate planning attorney to help you determine if gifting is advisable in your situation.