5143259-envelope-with-last-will-and-testamentOctober is a great month to reconnect with your clients.  It’s the beginning of the fourth quarter and clients are thinking about year-end tax planning. As part of that process, clients should be reminded that their tax planning not only involves income tax planning, but also includes gift, estate and generation skipping tax planning. Because of the huge increase in the federal gift tax exemption from 1 million dollars to 5 million dollars per individual, there are tremendous opportunities for gift planning. Under the present law, a husband and wife can give up to 10 million dollars to their children and grandchildren without paying one cent in federal gift tax! Study our feature article this week entitled, “How to Utilize the Federal Gift Tax Exemption” below.

How to Utilize the Federal Gift Tax Exemption
by Francis Burton Doyle, Esq., WealthPLAN

In our last newsletter, I encouraged readers to think beyond the $13,000 federal gift tax annual exclusion. I explained that although a very powerful and often under utilized tool, the annual exclusion has its limitations.  In addition, over the years the focus on the annual exclusion has dwarfed the thinking attendant to major transfers of wealth from one generation to the next.  This newsletter expands on that message and highlights three important areas where using all or part of the new 5 million dollar exemption will greatly benefit clients and their families.

Here are three major situations where utilization of the federal gift exemption is important:

1) First, the large gift tax exemption allows for the forgiveness of large inter family loans, which were necessary in order to prevent gift tax liability in years when the exemption was at the 1 million dollar level.  In many instances where, a senior generation wished to transfer a business or a large parcel of real property loans were used to facilitate the transfer.  Further, in many instances these loans were implemented at a time when interest rates were much higher than the present low interest rates. The payments on these loans are often very significant and have the effect of mitigating the transfer tax benefit of the transfer. In these cases, careful consideration should be given to having these loans forgiven so as to eliminate the transfer of significant wealth back to the senior generation and the large gift tax exemption provides an excellent opportunity for this forgiveness to occur.

2) A clients desire to transfer parcels of real estate to their children and grandchildren presents second opportunity. The large gift tax exemption coupled with depressed real estate prices has created an ideal environment for such transfers.  Furthermore, the tax law still allows for the application of minority interest and lack of marketability discounts to be applied to these transfers of property where entities such as family limited partnerships are employed as a mechanism to affect these transfers.

Here it should be noted that the IRS has proposed rules, which would eliminate or substantially curtail the applicability of such discounts for family wealth transfers.  It certainly could be argued that there has been no better time to make inter generational transfers of property and that there is an urgency to do so. The federal gift tax exemption is scheduled to revert to 1 million dollars per individual in 2013 and rules which would curtailing the applicability of minority interest and lack of marketability discounts could change as early as next year.

3) As final opportunity afforded by the present tax law concerns generation skipping trusts. The five million dollar gift and estate tax exemption also applies to generation skipping transfers. Accordingly, now is the time to establish trusts which benefit grandchildren and great grandchildren.  These trusts are commonly referred to as “Dynasty Trusts” because they run for the benefit of multi generations. In years past, the low federal gift tax exemption posed a significant barrier to the creation of these trusts. This year, however, the 5 million dollar per individual exemption allows these trusts to be established without any out of pocket federal gift tax exposure. The advantage of these trusts is to provide a fund to promote a family’s welfare from generation to generation without incurring federal estate, gift or generation skipping transfer tax.

In conclusion, this October offers a plethora of planning opportunities for estate planners and their clients. These opportunities can be taken only if planners bring them to the attention of clients. Consequently, now is the time to communicate with clients and inform them of the choices that are available to them under the present gift, estate and generation skipping tax law. Plan to invite your clients to work with you to take advantage of those benefits as soon as possible.

Francis Burton Doyle, Esq., is the founder of WealthPLAN, with over 30 years of experience in Tax, Estate-Planning Probate, Trust Administration and Litigation. He is Certified Legal Specialist, Taxation Law and Probate, Estate Planning and Trust Law (California State Bar). Frank is the Past President of both the Santa Clara County Estate Planning Council & the Silicon Valley Planned Giving Committee. Frank is also the Past Chair of the  Planning Committee, Annual Jerry A. Kasner Symposium, Santa Clara University, School of Law. Mr. Doyle provides all the course development and instruction for the Advanced Legal Training Institute.

Quote To Ponder

“I shall neither fail nor falter; I shall not weaken or tire…
give me the tools and I will finish the job.”
~Winston Churchill