This document discusses opportunities for gift and estate planning in 2012 given that beneficial estate and gift tax provisions are set to expire on January 1, 2013. It notes that the lifetime gift/estate and GST tax exemptions will decrease substantially, as will the tax rate, unless action is taken. It recommends making gifts now to take advantage of the higher $5.12M exemptions and lower 35% tax rate before they expire. Specific techniques discussed include outright gifts, trusts, GRATs, QPRTs, life insurance trusts, and sales to intentionally defective grantor trusts.

1. Gift/Estate Planning
Opportunities in 2012
Amy Joyce, CPA, J.D., Tax Manager
Margolin, Winer & Evens LLP
ajoyce@mwellp.com
1

2. Estate/Gift/GST Taxes – Beneficial Provisions Set
to Expire 1/1/2013
2012 Current Rules
 $5,120,000 Lifetime
Gift/Estate Exemption
 $5,120,000 Lifetime GST tax
exemption
 35% Tax on Transfers in Excess
of the Exemption Amount
 Deduction for state estate tax
2013 Sunset Provisions
 $1,00,000 Lifetime Gift/Estate
Exemption
 $1,00,000 Lifetime GST tax
exemption
 55% Tax on Transfers in Excess
of the Exemption Amount
 Credit for state estate tax
2

3. A Note About the Generation-Skipping Transfer
(“GST”) Exemption
• The GST is tax designed to complement the estate and gift taxes by
ensuring that transfers of property are taxed at each generation
level.
• The GST exemption allows property gifted outright, up to available
exemption amount, to avoid being subject to gift or GST taxes.
• The GST exemption allows property placed in trust up to available
exemption amount to avoid being subject to gift, GST or Estate
taxes.
• With effective GST exemption utilization, “dynasty” trusts can be
used to avoid transfer taxes for multiple generations.
3

4. Estate/Gift/GST Taxes – Legislative Uncertainty
After 12/31/12
 Several Possibilities:
1. Old Rules Return as Scheduled (“Sunset”) – Likely if Democrats
retain the Senate and the Presidency and seize the House.
2. Extension of Existing Rules – Likely if Republicans seize the
Senate and the Presidency.
3. Repeal of Estate/Gift Taxes – Possible (less likely than extension
of existing rules) if Republicans seize the Senate and the
Presidency.
4

5. Estate/Gift/GST Taxes – Legislative Uncertainty
After 12/31/12 (cont’d)
4. 2009 Rules Return – Possibility if November 2012 election results in
mixed outcome (compromise)
 $3,500,000 Estate & GST Exemptions
 $1,000,000 Gift Tax Exemption
 45% Tax Rate
Many experts with significant political observation histories feel that political
compromise will not be reached until well into 2013 but will be retroactive to
January 1, 2013.
5

6. President Obama’s February 2012 Budget
Suggestions
1. Estate Tax Exclusion – $3,500,000 (no mention of gift tax exclusion).
2. Portability – Obama proposal would make this permanent.
3. Irrevocable Grantor Trust – Obama proposal would subject trust to estate
tax upon grantor’s death; however, existing grantor trusts expected to be
grandfathered.
4. Dynasty Trust – Obama proposal would limit generation skipping trust
effect to 90 years (under current law some states, such as FL, allow trust
to exist as long as 360 years).
5. Valuation Discounts – Obama proposal would eliminate discounts for lack
of control, lack of marketability, etc.
Observation:
Republican House may be able to resist some or all of Obama’s
proposed new restrictive estate tax provisions, but trade off may be
drop in exemptions from $5.12 million to $1 million.
6

7. A Look at the 2010 Compromise –
Something similar for 2012?
• In December 2010, Congress intervened to prevent the Sunset
provisions from taking effect and increased the exemptions.
• Further, Congress provided for portability of spousal
exemptions.
• Does this sound like a Congress that would now go back to a
non-portable $1 million exemption?
• Uncertainty remains; however, respected commentators
suggest the more likely outcome will be to reset the
exemption to $2 million or $3.5 million and retain portability.
7

8. 2012 Offers the Perfect Storm for
Substantial Gift Planning
• Historically low interest rates work well with commonly used techniques
such as gifts and sales to trusts - extend beyond 2012
• Depressed asset values permit substantial appreciation to grow free of
transfer taxes –extend beyond 2012
• $5,120,000 gift/estate and GST exclusion permit transfers of significant
wealth free of transfer tax – may NOT extend beyond 2012
• 35% gift/estate/GST tax rates – may NOT extend beyond 2012
8

9. Which Assets Should be Gifted?
• Assets increasing in value – Appreciating assets held until death
may produce greater estate tax.
• High basis assets – Since the donor’s income tax basis carries over
to the donee, gifting higher basis assets reduces potential income
tax to the donee upon his later disposition of the assets.
• Valuation discounts – Take advantage of discounts when available,
such as lack of marketability & lack of control (e.g., limited partner
or non-managing member interests).
9

10. Lifetime Gifting Can Result in Estate “Freeze”
• Freeze = Planning device which allows one to freeze the present
value of his estate and shift future growth to successors.
• Basic Technique (outright gift): Parent gives real property worth
$100,000 to Child. Parent dies 25 years later when asset is worth
$500,000. Only $100,000 is includable in Parents' estate.
• Advanced Techniques: GRATs, IDGTs & other trust arrangements
• State Estate Taxes – Gifted assets are truly removed from one’s
estate (not just frozen in value) since all states (except CT) do not
impose any gift tax.
10

11. 2012 Gift Planning – Basic Techniques
• $13,000 per donee annual gift/GST exclusion ($26,000 for married
couple) for outright gifts:
• Example: Grandma & Grandpa have 2 married children and 6
grandchildren. Together Grandma & Grandpa can gift $260,000
($26,000 x 10 donees) of assets every year free of gift and GST
taxes and without depleting their lifetime exemption amounts.
• Unlimited exclusion for tuition payments.
• Unlimited exclusion for medical payments.
• If a family member has borrowed money, consider forgiving the
loan.
11

12. Benefits of Trusts
• Leverage annual gift tax exemptions –
withdrawal powers for multiple beneficiaries.
• Provide for spouse and children.
• Preserve some control over what happens to
transferred assets.
12

13. Personal Residence Trust
• Residence is excellent choice where liquidity is a
concern.
• Direct gift versus qualified personal residence
trust (“QPRT”) – impacted by low interest rates.
• Use/possession of residence after gift will require
FMV rental payments to avoid estate inclusion.
• Appraisal and possible TIC valuation needed.
• Example – Valuable vacation home.
13

14. Grantor Retained Annuity Trust (“GRAT”)
• Mechanics:
 Grantor transfers appreciating assets into an irrevocable trust for
a predetermined term of years (usually 2 – 15 years).
 During the trust term the grantor receives annual annuity
payments.
 Taxable Gift = FMV of property transferred reduced by
actuarially determined value of grantor’s retained annuity
interest.
 At the end of the trust term, remaining assets pass to named
beneficiaries free of gift tax.
14

15. Grantor Retained Annuity Trust (“GRAT”) –
cont’d
• Beware of the Estate Tax Inclusion Period (“ETIP”) – If grantor dies
prior to end of trust term, assets are included in grantor’s estate.
• GRAT can still be very effective with $1 million or less of gift
exemption.
• Choosing a higher annuity will increase the present value of
grantor’s retained income interest to a point that the remainder
interest (and hence the gift) can be very small or even eliminated.
15

16. Generation-Skipping Trust
• Also known as a “dynasty” trust.
• Leverages both gift and GST tax exemptions.
• Excellent choice for locking in current $5.12
million exemptions.
16

17. Irrevocable Life Insurance Trust (“ILIT”)
• Life insurance proceeds not subject to estate
tax or income tax.
• Gift/GST Tax Leverage – value of “gift” equal
to premium payments but eventual exclusion
of policy’s full face value from transfer taxes.
• Creditor/Divorce Protection – spendthrift and
other provisions may protect proceeds from
claims of creditors & beneficiaries’ ex-spouses.
17

18. Installment Sale to Intentionally Defective
Grantor Trust (“IDGT”)
• Mechanics:
 Trust intentionally drafted to be disregarded for income tax
purposes but not for gift, estate or GST purposes.
 Grantor “seeds” the trust with a gift equal to 10% of the value of
the property to be sold.
 Grantor sells appreciating assets to the trust and takes back an
installment note at a low interest rate.
 Since the trust disregarded for income taxes, no capital gain on
sale of assets and no tax on interest collected.
18

19. Installment Sale to IDGT – cont’d
• Grantor achieves indirect gift-tax free transfers to trust via paying tax on
income earned by the trust, thus allowing trust assets to compound on tax
favorable basis.
• Trust can have tax reimbursement clause if grantor’s income tax liability
causes cash flow concern.
• No ETIP concern.
• Sale to IDGT can still be very effective with $1 million or less of gift
exemption.
19

20. “Portability” Trust
• If spouse dies and leaves unused estate tax
exemption:
1. Surviving spouse may use exemption of
deceased spouse.
2. Under current law, only available for
spouse who died in 2011 or 2012.
3. Portability does NOT apply to GST tax
exemption.
4. Example – separate trusts.
20

21. Trusts Created by Married Couples & Asset
Protection Trusts for Single Individuals
• Alternative for those reluctant to part with assets at this time, but
who also do not want to waste the savings available via the
increased gift tax exemption amount.
• Have your cake and eat it too!
21

22. Nonreciprocal Trusts Created by Married
Couples
• Spouses can create trusts for each other’s benefit. Assets
transferred to such trusts, plus appreciation, are removed from the
spouses estates.
• If the grantor-spouse needs access to assets, the beneficiary-spouse
can receive a distribution from the trust.
• If descendants are included as trust beneficiaries, the trustee can
make distributions to the descendants free from gift tax.
22

23. Nonreciprocal Trusts Created by
Married Couples – cont’d
Reciprocal Trust Doctrine (“RTD”)
• If trust leaves donor in essentially same economic
position as if he simply named himself beneficiary of
his own trust, then gift transfer is disregarded and trust
for beneficiary spouse is included in his estate.
• Avoid RTD by varying terms of each trust:
 Different trustees
 Different beneficiaries (useful in personal residence trusts)
 Different distribution standards
 Different assets
 Different funding dates – allow as much time as possible to elapse
between funding two trusts.
23

24. Domestic Asset Protection Trusts (“DAPT”) for
Single Individuals
• A DAPT is self-settled trust of which the grantor is a beneficiary.
• The trust must be formed in a jurisdiction, such as Delaware, that
has DAPT legislation.
• If properly structured, the value of the assets transferred to the
trust are frozen in the grantor’s estate and the assets remain
available for use during his lifetime (provided that a DAPT state
resident trustee is responsible for making distributions from the
trust).
• To the extent distributions are not made, trust assets will
accumulate within the DAPT free from future transfer taxes.
*Proper asset protection planning requires knowledge and experience in the areas of debtor-creditor law,
commercial law, civil procedure law, conflicts of laws, judgments & remedies and bankruptcy, etc.
24

25. Amending “Irrevocable” Trusts -
Decanting
• “Decanting” is the process by which a trustee, who has
discretion to distribute trust principal, exercises such
discretion in favor of a new trust with different terms and
conditions.
• Many states, including NY, have enacted statutes that
specifically authorize the decanting of a trust.
• Under NY law, the new trust cannot expand the trustee’s
distribution authority.
• Decanting is useful for a surviving spouse who wants to gift
assets held in a QTIP where principal distributions are subject
to a standard, i.e., not purely discretionary.
25

26. Selecting a Trustee
• Consider trustee provisions carefully as trust
flexibility often requires giving the trustee lots
of power.
• Ensure that trustee and successor trustees are
people or entities that you trust.
• Establish clear, well thought out plan for
naming successor trustees.
 Example – Trust may permit majority of adult income
beneficiaries to name successor.
26

27. How to Fund Trusts When Time is
Running Out
• Leveraged gifts of equity interests or real estate require
appraisals, discount valuations and/or lender approvals.
• If appraisals, etc. have not been done or cannot be
completed before 12/31/12, consider gifting cash to trust
in 2012 and using “swap power” in 2013 to transfer hard
to value or contractually constricted assets.
• Asset substitution is a “non-gift” transfer; may start
statute of limitations by filing 2013 gift return.
• Gift to existing trust versus creating new trust.
27