Now Is The Best Time to Do Estate Planning!
Did you know that now is the best time to do estate planning? In 2012, taxpayers have five compelling reasons to take advantage of a unique tax climate and real estate market enabling them to potentially secure tremendous estate tax savings. Taking advantage of the current favorable estate and gift tax exemptions, historically low property values and interest rates, discounts for lack of marketability, and defective grantor trusts will enable individuals with foresight to preserve and protect their wealth like never before. But here’s the catch: You must act before January 1, 2013!
Here are the facts:
1. Currently, there is a $5 million lifetime exemption for gift and estate tax. But if Congress and the President fail to act, the $5 million exemption is reduced to $1 million on January 1, 2013. The President’s budget proposed a $3.5 million estate tax exemption and a $1 million gift tax exemption going forward. So the $5 million exemption offers a unique estate planning opportunity that might disappear at the end of the year.
2. Distressed sales are pulling down the market for real estate creating historically low property values. In addition, appraisals now can use historical data from the recession to reduce business appraisals. With a slowly improving economy, these historically low values might not be around for much longer.
3. The IRS approved interest rates for related party transactions as low as .25% for short term obligations of 3 years or less, 1.15% for obligations between 3 and 9 years, 2.7% for obligations of 9 years or more. These historically low interest rates allow clients to freeze the value of their estate through sales and loans to Defective Grantor Trusts, with any future appreciation (excepting the small amount of interest paid) accruing outside of the client’s taxable estate.
4. Today, discounts for lack of marketability and lack of control can be used to value ownership interests in family owned entities. Simply fractionalizing assets and/or placing them in family owned entities can reduce the value of an estate by substantial amounts (25-40%). The IRS does not like these discounts and is looking to the President and Congress to eliminate their use for family owned entities. The President’s recent budget proposal would eliminate these discounts on family owned entities. If the President and Congress fail to eliminate these discounts, it is likely the IRS will, itself, act to reduce the estate tax advantage of these discounts through regulation. Therefore, time is of the essence to take advantage of these discounts.
5. Today, Defective Grantor Trusts can be used to reduce estate tax exposure. Defective Grantor Trusts are recognized for estate tax purposes but disregarded for income tax purposes. This allows us to transfer assets to the Defective Grantor Trust without income tax consequences. The President’s 2012 budget would cause grantor trusts to be disregarded for estate tax purposes (like they are for income tax purposes), thus eliminating their use for reducing estate tax exposure. While the President’s budget won’t pass this year, it is an indication of what future legislation might hold as the President and Congress look to increase revenues.
The next 7 months present an exceptional window of opportunity for individuals to make wealth transfers and decrease the size of their taxable estate. Unless the President, the Senate, and the House of Representatives all agree otherwise, income and estate taxes will increase dramatically on January 1, 2013. Those who understand will take full advantage of this estate planning opportunity before it’s too late.
If you need help with your estate plan or would like to learn more, please do not hesitate to contact us at (404) 255-7400.
