With the reunification of gift and estate tax tables starting in 2011, it might be worthwhile to make gifts at the new $5 Million levels before Congress reduces it. With gift splitting, this means that a married couple could give up to $10 Million to the next generations. The issues: (1) What if they lower the exclusion rate after 2012 to say $2.5 Million and the couple dies in say 2013. Does that mean that the $5 Million already given away is now subject to estate taxes? Under the strict language of the Code that’s a possible conclusion. But what if Mom and Pop’s assets are below the amount of the Tax can the IRS go after the assets given away? That’s more complicated. That goes into the issue of transferee liability. If you receive something subject to a transfer tax and that tax isn’t paid, normally the tax follows the asset. But in this case, the gift tax was paid by the unified credit exclusion and just because that exclusion changed does not make that asset a transferred asset in my view. However, it is something to be concerned about. As we near the end of 2012, it may very well be good to go ahead and make gifts. (2) Liquidity. Ma and Pa may want to limit gifts to ensure liquidity to them. And the only gifts that will work are outright gifts without any retained ownership of them. (You can make gifts in trust for other people, just not yourself-if you did, keep the beneficial interest it would trigger an estate tax on your death). So, folks need to plan what their needs will be long term before such a gift. (3) Vermont residents may be some gift tax issues. So, check with your local attorneys to be sure that you are not running afoul of a state gift tax liability.
The $5 Million Estate Tax Exemption
Beware, the $5 Million exemption is Federal only. You need to look at your state laws to see if there is a State Estate tax and what the exemption amount is. Many states decoupled from the Federal Estate tax. So, let’s say pops dies in 2011 owning $10 Million in property. He leaves it all in a credit shelter trust. Let’s assume that he lives in a state with a State Estate Tax, he’s going to be subject to that tax (perhaps as much as 20% in some states) on $4 Million. With the new Act allowing the wife to tack on the Husband’s Federal Estate Tax exemption, it is better to make the Family Trust limit be the $1 Million amount with the rest being put in a qualified terminable interest trust (QTIP) for Moms. That way when Mom dies, it she can add together the exemptions and delay the estate tax in the estate. Many states do not have a gift tax, so if Mom and Dad are willing to make huge gifts in 2011 and 2012, and trust their kids (a huge assumption), this could be a strategy especially early in 2011 before such laws are enacted to close that “loophole”.
A new Thought on the GST
Contrary to my earlier assertions, gifts in Trust over the $1 Million gift tax could be subject to the GST when a skip person dies. It is better to make gifts directly to skip persons such as grandchildren and great grandchildren in 2010.
Christmas Eve
As we get ready for Christmas, this is a time to think about the meaning of Christmas. As a Christian, Christmas is about the birth of our Savior, Jesus Christ. As the parties wind down, and the family gatherings begin, those of you who believe that Christ was the Son of God, take time to worship and thank God for the gift of his Son to us. Merry Christmas.
How a Tax Benefit becomes a Shelter
Joe owns a short line railroad. Joe needs to repair a bridge over the Little Stinky River. But Joe doesn’t have any money and his profitability is so low, he can’t get a bank loan. No problem. Joe is having a few stiff ones at the local bar and is sadly telling the bartender that without repairing the bridge, he’ll have to shut down his railroad. Ted Tax Lawyer is sitting at a nearby bar stool and says, “there might be a way to do this. How many miles is your railroad?” “100”, Joe answered. You need to set up an LLC and assign your track to it for a $1 for 3 years, and the bridge for 20 years. The LLC will charge the railroad a toll to cross it.” Ted asks Joe how many trips across the bridge per day and Joe says, “two, One up and one back”. “So that’s 730 trips a year? How much will it cost to fix the bridge to like new?” Joe thinks for a minute and says, “$1 Million”. “And the bridge will last for how long? Ted asks. “20 years”. “Okay so that’s 14,600 trips over the bridge for its lifetime is that correct?” Ted inquires. I guess, so, Joe answers.” Ted, pulls out his calculator, “that adds up to $69 a trip. So, you now sell shares in the LLC to investors, ” Tax Lawyer Ted replies. “But who would buy it?” Joe asks, pleadingly. “Guys who want a tax credit, now”. They can buy a share in the LLC and when the LLC spends the money on the bridge, they get up to a 50% credit which is paid back in dribs and drabs over 20 years as income. So, each share would be $7,000 since there is a cap of $3,500 per mile per year. You’ll need to take three years to repair that bridge. So, for every dollar invested they get a 50% credit on their taxes in the for each year” Tax Lawyer Ted explains. That means if a guy invests $100,000, he is creditted with having already paid $50,000 to IRS on his taxes”.
So that’s how a tax shelter works. A benefit such as this, has to be (1) Assignable; (2) spend; and (3) large enough to get someone’s attention as a credit.