Time is running out for your wealthy clients to take advantage of the generous 2010 tax laws that lowered gift tax exemption amounts and tax rates.

Currently, lifetime gift-tax exemptions are at $5 million per individual and $10 million for married couples — but those limits are set to dwindle dramatically to $1 million for single filers and $2 million for couples on January 1.

The estate tax rules also changed with the 2010 law, making the exemption the same as those for gifts and also lowering the tax rate to 35 percent. At the end of 2012, it’s set to shoot back up to 55 percent.

Because no one knows how the tax landscape might change after the presidential election in November and a new Congress convenes in January, careful planning now could save clients and heirs millions in future tax burdens.

Options are key

The Wall Street Journal (http://tinyurl.com/86nuwg3) reports your clients have more leeway to make gifts now than they likely will in the future. The benefits could be substantial. Clearly, $5 million that grows at 5 percent a year for 20 years is more beneficial than the same growth rate for $1 million, but that isn’t the only way giving more now protect heirs’ assets.

If the return on the initial $5 million gift dropped by 5 percent a year for 20 years, your clients’ heirs would be much better off than waiting until the limit was $1 million.

In trust we trust

Creating a $5 million or $10 million trust now, Reuters reports (http://tinyurl.com/4art5sd), ensures that your client never will pay estate tax or gift tax on that money, in effect creating a “dynasty trust” by simply signing a check.

Invested wisely, your client’s gift to children, grandchildren and great-grandchildren will benefit throughout their lifetimes. Including language to equalize the amount heirs receive can protect everyone’s assets and avoid conflicts.


The expiring rules also let wealthy clients conclude estate planning that in the past was conducted using low-interest intra-family loans. Forgiving those loans allows your clients to use the current exemptions without writing a check, but following all existing IRS rules is key.

For instance, The Wall Street Journal reports, some tax and estate planning attorneys recommend a two-step process. First, your clients give child money, which the child then later uses to repay the loan. That gives validity to the original loan and avoids the possibility of creating what’s called ‘cancellation of indebtedness income,’ on which your clients’ children could owe taxes.

A word to the wise

Before your clients decide to make a gift and take advantage of the gift-tax and estate exemptions, experts recommend they should make sure that they will have enough money to live on comfortably. The rush to avoid future tax burdens should not come at the expense of their own well-being.

With that in mind, it’s important to remember that just as higher gift exemptions can bring greater future wealth, so can poor investments or planning create the possibility of greater losses. It’s a complicated issue, and the next couple months will be important to ensuring your clients — and their heirs— take advantage of the existing rules wisely.

Contact our office if you have questions about this issue or want to discuss other wealth protection strategies.

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