Fewer than six months remain to take advantage of what could be one of the best opportunities for wealth transfer in recent decades. For the remainder of 2012, the federal gift, estate and generation-skipping tax exemptions are $5.12 million per person ($10.24 million per couple), and the tax rate imposed on taxable transfers in excess of that amount will remain at a historically low 35 percent. On January 1, 2013, in the absence of Congressional action, these exemptions will decrease to $1 million per person ($2 million per couple), and the tax rate on transfers in excess of these amounts will increase from 35 percent to 55 percent.
Individuals can achieve personal goals and dramatically impact future estate tax exposure by transferring wealth to future generations through gifts or related sale
transactions completed by December 31, 2012. Individuals must make the decision to take advantage of this unique opportunity soon, whether the transfer is a gift, sale or a combination of both, because it is important to act while there is time to complete all necessary steps in the transaction.
Question – What type of gift transfers techniques are available?The closer we come to year-end, the more difficult it may be to obtain needed appraisals and finalize other elements of a transaction. The selection of an appraiser may be even more important because some may have to decline projects as the end of the year approaches, or may require a premium to be paid to ensure the project is completed by year’s end. In addition, transfer agents may need extra time to transfer title to certain assets such as shares of stock.
The following is just a brief sampling of the different types of transactions and parties that may involved
before the transaction can be completed:
If a gift or sale involves –
- An irrevocable trust, partnership or other entity:
- Time is needed to understand, contemplate and make irrevocable decisions about choice of trustee, distributions to beneficiaries, jurisdiction, etc.
- An experienced attorney will need time to draft the trust.
- Calculations or actuarial projections may need to be analyzed.
- If a corporate trustee is going to be involved in a trust matter, the corporate trustee will need time for its internal review procedure.
- If an entity such as an LLC or LP, is created, an experienced attorney will need to be involved to draft the operating or partnership agreement to address the client’s needs on the management and control of the entity.
- If there will be a transfer of an ownership interest in an entity, a valuation expert will need to value the interest to be transferred and produce a valuation report.
- A closely held business interest, or oil, gas or mineral interest:
- A business valuation expert will need to be involved to value the interest and produce a valuation report.
- A geologist may also need to be involved with respect to an oil, gas or mineral interest.
- If a trust or other entity is part of the transaction, additional time is needed to address the issues outlined in number 1, above.
- Real property:
- A real estate appraiser will need to be involved to value the property and produce a valuation report.
- A deed will need to be prepared and recorded in the local county where the property is located.
- If a trust or other entity is part of the transaction, additional time is needed to address the issues outlined in number 1, above.
- Publicly traded stock:
- A transfer agent for the stock will need to be involved to make the transfer and, depending on the agent, this can involve a significant amount of paperwork and possible delay.
- If a trust or other entity is part of the transaction, additional time is needed to address the issues outlined in number 1, above.
- Life insurance:
- An insurance application, health examination and underwriting process will be needed. It may be necessary to wait for participation of insurance agents, health care providers and insurance companies.
- If a trust or other entity is part of the transaction involving insurance, additional time is needed to address the issues outlined in number 1, above.
For those individuals who are uncertain about making a sizable gift of their net worth for any number of reasons, one solution may be to set up a potential gift by a using a revocable trust of which the individual is the grantor and trustee. Then, at a future date no later than December 31, 2012, if the individual wants to make the gift complete, he or she could “pull the trigger” and make the trust irrevocable, thereby ceasing to be trustee and making the gift effective at that time. Even with this wait-and-see approach, it is important to allow time for the drafting of the trust, valuation and transfer of the property so that everything is in place for the gift to be completed in 2012.
Technically, individuals have until the end of the year to enter into a gift or sale transaction to take advantage of this unique wealth transfer opportunity, but in reality, they may not be able to wait so long because of the time required to properly complete the transaction. In some cases, it can take several months to complete appraisals – and appraisers may not be able to immediately begin a new project because of the rush of gifts being made in the coming months. As a result, there may not be enough time to complete a transaction for those individuals who wait until a time closer to the end of the year to start the process. Even what may appear to be an uncomplicated transaction takes time to implement. Because the future of the tax laws is uncertain,
now is the time to take advantage of this unique opportunity and start involving those advisors who are necessary to the implementation.