Estate Planning ?Window of Opportunity? ? Martindale.com

July 21, 2012

Previously published on July 17, 2012

Will the Estate Planning ?Window of Opportunity? Close After 2012?
With current, favorable federal estate and gift tax rules slated to expire at the end of 2012; the potential sunset of Bush era tax cuts and imposition of a new Medicare surtax on investment income in 2013; and current interest rates at historically low levels - the remainder of 2012 provides an opportunity to achieve significant estate objectives that may not be attainable after the year ends.

In addition, of import to our Ohio resident clients is the fact that state law regarding Financial Powers of Attorney was recently changed substantially.

We think that it is important for many of our clients to review their existing estate plans in light of these developments. The purpose of this Client Alert is to briefly summarize the planning considerations in each of these areas.

Scheduled Estate and Gift Tax Changes

The 2010 tax act set the lifetime exemption amount for the estate, gift and generation-skipping (GST) taxes at $5 million per person (indexed for inflation) for 2011 and 2012.? (The indexed exemption amount is $5,120,000 for 2012).? This is the amount that an individual can transfer via lifetime gifts, or at death, without incurring a federal ?transfer tax? (that is, an estate, gift or GST tax).? The 2010 tax act also set the maximum federal transfer tax rate at 35%.? Effectively, this lifetime exemption amount allows a married couple to gift $10 million in 2012 (assuming no prior taxable gifts) without incurring any gift tax, thereby potentially reducing their eventual exposure to the federal estate tax by this amount (plus any subsequent appreciation on the gifts).

Unfortunately, under the 2010 tax act, these relatively favorable transfer tax provisions are scheduled to ?sunset? at the end of 2012.? Thus, under current law, in 2013 the lifetime estate, gift, and GST exemption amounts will drop to $1 million; and the estate, gift, and GST maximum tax rate will increase to 55%.

While there has been some speculation that Congress might move before year end to restore the more favorable (or similar) transfer tax rules for 2013 (or even repeal the transfer taxes) - that is only speculation at this time.? While Mr. Romney has come out in favor of estate tax repeal, President Obama does not appear to favor restoring the current favorable rules - let alone considering repeal of the transfer taxes.? So, the future of the transfer tax rules will very much depend on the outcome of this fall?s election, among other factors.

In this setting, individuals facing the potential for significant future federal estate taxes should give serious consideration as to whether it is feasible and desirable to embark on a gifting program this year that takes advantage of some or all of the $5 million per individual exemption ($10 million for married couples), and potentially reduces future estate taxes commensurately.

Of course, we recognize that for even our most financially secure clients, it may not appear feasible to make such significant outright gifts without jeopardizing their own lifestyles; and such significant gifts may not be consistent with their current philosophy and objectives for benefitting subsequent generations.? In that regard, our estate planning group can suggest a number of alternative techniques that will assure our client an income stream from the gifted assets, and/or assure that subsequent generations actually benefit from the gifts only in accordance with the objectives specified by our client.

Bush Era Tax Cuts and the Medicare Surtax

Favorable income tax rates included in legislation passed in 2001 and 2003 (the so-called Bush era tax cuts) are also scheduled to expire at the end of 2012.? As with the estate tax, the fate of those tax cuts is expected to depend on the outcome of the presidential election. Mr. Romney favors wholesale extension of the cuts, while President Obama favors increasing the rates for those with incomes over $250,000.

In addition, the 2010 health care legislation (often referred to as ?Obamacare?) included a provision that will levy an additional 3.8% Medicare tax on investment income beginning in 2013.? The tax will be imposed on married couples (filing joint tax returns) with modified adjusted gross income of $250,000 or more; and on single individuals with modified AGI of $200,000 or more.? This tax will be levied on net investment income, including interest, dividends, and capital gains.? For such higher income individuals, the tax will also be imposed on the taxable portion of any sale of a residence.? (On the sale of a residence, only the amount of the gain that exceeds 250,000 for single individuals, or $500,000 for married couples, is taxed).

With the additional taxes looming for 2013, clients should consider the benefits of accelerating income into 2012 (for example, by closing a sale on a residence before year end) to avoid the potentially higher taxes next year.

Market influences

Today?s historically low interest rates and depressed asset values make this an excellent time to engage in various estate planning techniques. These market conditions present several planning opportunities for transferring wealth at little or no gift tax cost.

Some of the strategies that are particularly effective in this type of market include:

• Loans to family members

• Sales to ?defective? grantor trusts - these trusts provide the grantor with the opportunity to remove future appreciation on selected assets from the grantor?s taxable estate while retaining control and an income stream from the assets.

• Grantor retained annuity trusts (?GRATs?) - GRATs are irrevocable trusts to which a grantor transfers property while retaining the right to receive annual annuity payments for a specified term of years (i.e., another estate planning tool that can transfer future asset appreciation to beneficiaries at a relatively minimal gift tax cost).

• Charitable lead annuity trusts (?CLATs?) - these are irrevocable trust to which a grantor contributes assets that are used to pay a fixed dollar amount to a charity for a period of time; with the remaining assets returned to the grantor, or distributed to his or her spouse, heirs or others at the end of the charitable term.? This vehicle can provide both a charitable deduction for the grantor, and an effective transfer tax planning strategy.

Ohio Financial Powers of Attorney

A financial power of attorney (POA) is a legal document an individual (the ?principal?) can use to appoint someone (the ?agent?) to act on his or her behalf regarding personal, financial and business matters.? Ohio revised its statute governing financial POAs effective March 12, 2012.? A key focus of the new law is preventing financial elder abuse; and, when it does occur, uncovering it and providing a remedy. The new law includes a statutory form with language designed to help prevent agents from abusing their power. The form lists actions that an agent may not take and includes a section called ?Important Information for Agent,? describing in plain English the agent?s duties and responsibilities.? While POAs created before March 22, 2012 will still be valid, clients may want to revise existing POAs to incorporate the new law?s provisions in order to minimize the risk of abuse by an agent, and to increase the likelihood that a financial institution will accept the POA.

Source: http://www.martindale.com/trusts-estates-law/article_Frantz-Ward-LLP_1555802.htm

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