Take Advantage of the $5.12 Million Dollar Gift Tax Exemption in 2012

Take Advantage of the $5.12 Million Dollar Gift Tax Exemption in 2012

There has been a lot of media coverage about the Bush tax cuts that are set to expire on December 31, 2012 and whether they will be extended for all taxpayers or if they will be discontinued for top earners. But not nearly as much has been said about the current estate and gift tax rates that are also due to expire on December 31.

What we have for the next few months is an historic opportunity in estate planning. At the end of 2010, Congress put in place a two-year estate tax provision that included a huge gift no one had been expecting: a $5 million gift and estate tax exemption, the highest it has ever been. It was indexed for inflation for 2012, making it even higher—$5.12 million—but for this year only.

Not nearly enough people have taken advantage of this. Some think it doesn’t apply to them because their net estate is less than $5.12 million, and others think they can’t use it because they don’t plan to die in 2012. But they are mistaken, and are likely missing the chance of a lifetime when it comes to estate planning. Here’s why 2012 is such an incredible year for estate planning.

* This is a combined gift and estate tax exemption, so you don’t have to die in 2012 to use it. It can be used to make gifts in 2012 and still exclude up to $5.12 million from estate taxes when you die, regardless of the amount of the estate tax exemption at that time. The exemption is per person, so a married couple can give twice this amount, or up to $10.24 million.

* Under current law, this $5.12 million exemption will decrease to just $1 million on January 1, 2013 and the top tax rate will increase from 35% in 2012 to 55% in 2013. Those with estates over $1 million who do not plan now and who die in 2013 (and quite possibly in later years) will pay considerably more in estate taxes—and leave that much less to loved ones.

* The generation skipping transfer (GST) tax exemption is another reason to plan this year. This tax applies when assets are transferred (by gift or inheritance) to a grandchild, great-grandchild or other person more than 37.5 years younger than the person making the transfer. The GST tax is equal to the highest federal estate tax rate in effect at the time and is in addition to the federal estate tax. In 2012 the exemption for the GST tax is also $5.12 million ($10.24 million for married couples) and the tax rate is 35%. Next year, the exemption will be about $1.4 million and the top tax rate will be 55%. Planning now allows considerably more to be given to grandchildren and future generations without incurring this onerous tax.

* In 2012, estate planners have options that are considered “standards.” For example, gifts can be made using life insurance, various trusts, family limited partnerships and others, often using discounted values that leverage exemptions, without losing control. But these may soon be history as lawmakers search for more ways to generate revenue and close perceived loopholes.

* Lastly, interest rates (bound to increase in 2013) are at historic lows and thus there has never been a better time to do intra-family loans and other interest-rate-sensitive planning.

Of course, Congress could change the laws before January 1 but, based on recent history, that seem unlikely. Even if Congress does change the laws, we have no idea what the new ones will be. It’s best to plan based on what we know—not on what we think might happen. This once in a lifetime opportunity is about to expire. You don’t want to miss it.

Justin Peltier is an estate planning attorney with offices located in Merrimac, MA with the sole focus of estate planning, elder law, probate and trust administration, and business planning. Please view our website for more information at www.jpestateplanning.com or join our social media community below. You can also reach me directly at justin@jpestateplanning.com or (978)319-6006.

A Way to Avoid Gift Taxes

As an estate planning attorney in Massachusetts, gifting to the next generation (or multiple generations) is often a concern for those that have accumulated wealth.  A great tool in today's low interest rate environment is a GRAT.  Below is an article in Forbes that is a prefect example of having your cake and eating it too (minimizing or not paying a gift tax AND transferring wealth to the next generation). 

Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free

 

 

 

Not too young for estate planning: In 2008 Mark Zuckerberg, then 24, put $3,023,128 worth of Facebook stock into a grantor retained annuity trust.

Mark Zuckerberg and Dustin Moskovitz, the co-founders of Facebook and two of the world’s youngest billionaires, may seem too young to be thinking about estate planning. But in 2008, when they were both 24, they used an estate planning tool that is more familiar to people two or three times their age. It involved putting pre-IPO stock into a special kind of trust that will explode in value when the company goes public. In the process Zuckerberg and Moskovitz, by FORBES conservative estimate, will together shift $185 million to trust beneficiaries without having to pay gift tax. Sheryl Sandberg, Facebook’s CEO, who was then 39, used the same strategy to transfer at least $19 million tax-free.
There’s nothing illegal about what these executives did. In fact, their experience is a case study in how the ultra-rich and even the moderately wealthy can work within the parameters of the tax law to transfer vast sums of money without having to pay gift tax. Incidentally, according to the 2012 FORBES Billionaires list, Zuckerberg (#35 on the list) has a net worth of $17.5 billion and Moskovitz (#314) is worth $3.5 billion.

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The wealth-transfer strategy that the Facebook billionaires used gets a passing reference in footnotes of the company’s public stock offering. It indicates that each of these company executives is the trustee for a separate annuity trust named after them and funded with shares of Facebook stock. (Moskovitz left Facebook in 2008 to co-found Asana.)  This is almost certainly a reference to the popular estate planning technique known as the grantor retained annuity trust or GRAT.
Here’s how these trusts work: the person setting up the trust, known as the grantor, puts company shares into a short-term irrevocable trust and retains the right to receive an annual income stream, known as an annuity, for a preset time (for this type of asset, it is typically 5 to 15 years). If the grantor survives that period – a condition for this tool to work – any property left in the trust when the annual payments end passes to family members or to a trust for their benefit (they are the remainder beneficiaries).
The annuity should be approximately equal to the value of the assets transferred, plus an assumed interest rate that the government imposes, known as the Section 7520 rate. If the assets in the GRAT appreciate by more than that rate, all the excess passes to the beneficiaries with little or no gift tax. If the appreciation never occurs, the trust can satisfy its payout obligations by returning more of the assets to the grantor—the person who created the trust.
For more than a decade, it has been possible to form what’s called a zeroed-out GRAT, in which the remainder is theoretically worth nothing so that there is no taxable gift. In 2008, when the Facebook GRATs were set up, there was federal gift tax (at a 45% rate) if you gave away more than $1 million in cash or other assets during life. A zeroed-out GRAT enables wealthy folks to use their lifetime gift tax exemption for other transfers. Plus, there’s no exemption wasted if the asset does not perform as hoped.
How much will the Facebook billionaires wind up shifting this way? Let’s assume that the shares were bought under the company’s 2005 Stock Plan and were purchased at 83 cents per share. Under that scenario, using share quantities from Facebook’s securities registration statement filed on Feb. 1, Zuckerberg transferred $3,023,128 worth of stock (3,642,323 shares) to his GRAT; Moskovitz put $11,955,748 worth (14,404,516 shares) into his; and the starting value of Sandberg’s trust was $1,576,988 (1,899,986 shares). The SEC filing does not indicate how long each GRAT will last, who are the beneficiaries or what the shares were worth at the time.
More revealing is how much will be left at the end of the GRAT term because that’s what will go to beneficiaries free of gift tax.
FORBES asked Lawrence P. Katzenstein, a lawyer with Thompson Coburn in St. Louis to run the numbers, using the Tiger Tables Actuarial Software, which he created. We assumed that the GRAT lasts five years, with the stock growing modestly at a rate of 3.6% for the first four years (a conservative estimate); during this time, the annuity to the grantor will be paid with shares of stock. Then we assumed that in year five of the GRAT, before making the final annuity payment, Facebook goes public at $40 per share and the GRAT ends without any further change in the stock price.
Based on these assumptions, the total tally for tax-free transfers through the three GRATS is $204,353,993, divided as follows:
Moskovitz: $147,573,190
Zuckerberg:  $37,315,513