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Wealth Planning: Seizing the Opportunity in 2012

Deloitte Insights video

Wealth transfer tax rates are expected to rise dramatically in 2013, which means the time is now to take advantage of tax opportunities. Find out what you need to know before we usher in a new year – and potentially new tax legislation – in this episode of Deloitte Insights.


Craig Janes, Partner, Deloitte Tax LLP
Eric Johnson, Partner, Deloitte Tax LLP


It’s time for Insights, a video news production of Deloitte LLP. Now, here’s your host, Sean O’Grady.

Sean O’Grady (Sean): Hello and welcome to insights. Wealth transfer tax rates are expected to dramatically rise in 2013, but for now, it is still 2012, meaning there are tax opportunities to be had and potential financial moves to be made before that ball down the street here in Times Square drops and we usher in a new year with potentially new tax legislation. Now, with this in mind, we are joined today by two guests to discuss some wealth transfer opportunities available now in 2012. The first is Craig Janes, a partner in Deloitte Tax and part of Deloitte’s Washington National Tax practice. We also have Eric Johnson. He too is a partner in Deloitte Tax and competency leader for Estate, Gift, Trust & Charitable Planning. Gentlemen, I would like to begin with some context and understand what kind of wealth opportunities we see available right now in 2012.

Craig Janes (Craig): Well, for those taxpayers that have never given taxable gifts, the law now permits each taxpayer the ability to transfer $5.12 million without incurring a tax. So, if you are dealing with a married couple, it is $10.24 million and that is going to change. When we get to 2013, the maximum amount each taxpayer can give will be limited to a million dollars, and we are going to see a dramatic increase in the tax rates. So, we are going to go from 35% today, which is the lowest it has been since the Roosevelt administration, and we are going to go back to 55%, which is what the rate was back in 2000.

Sean: That is a pretty big shift.

Craig: Big shift.

Eric Johnson (Eric): Sean, and this opportunity is available for everyone. Prior to 2011, the gift tax exemption was only a million dollars, and so many wealthy individuals burned through that million and even made taxable gifts, but with the new law, this incremental $4 million is available regardless of your gift giving in the past. You know, that being said though, a number of folks have not taken advantage of this opportunity. There are some commentators out there that believe that even though this $4 million dollar increase allows you to transfer wealth gift-tax-free, that in fact when you die, potentially, those transfers are clawed back into your estate and taxed for estate tax purposes. We collectively believe that that interpretational law is not accurate or intended and there shouldn’t be any impediment for taxpayers to take advantage of this opportunity.

Sean: So, given that view, how do you suggest someone take advantage of the size of this opportunity?

Eric: Yeah, I think wealthy taxpayers need to think big. I think they need to look at their portfolio. If they have an asset that has a particularly rosy future, they believe it is going to appreciate substantially, that is the perfect asset to transfer out now if they can afford to do so. If they are concerned about not receiving the cash flow of that asset, maybe gift part of it and sell the rest in exchange for an interest-bearing promissory note. Now, on that point, one of the ideas out there is a grant for trust sale. This is about establishing and funding a trust that is a grantor trust; that means it is taxed to you for income tax purposes and then looking to sell assets to that trust in exchange for an interest-bearing promissory note. In this transaction, not only is the sale disregarded for income tax purposes, but also the assets that are in trust are not subject to further gift or estate taxes for many generations.

Sean: And how about you, Craig?

Craig: Well, I think it is also a perfect time to go back and look at what you have done in the past. A lot of folks were doing significant planning when the market was going up prior to 2007. Some of the ideas they might have undertaken or planning they might have undertaken then probably didn’t perform as intended after the recession hit. For example, Eric mentioned a special sale of assets to a grantor trust. Oftentimes for transactions done back in 2006 and 2007, those assets haven’t performed, perhaps they are underwater. Maybe you want to consider modifying the terms of the note and using your $5.12 million to do that or maybe even forgive the note. So, again, there is a chance to fine tune or tune up old plans as well as doing new transactions.

Sean: Now, this is not an insignificant amount of money, so if some is hearing this and they are feeling trigger shy, they don’t want to part with that amount of funds right now, are there other opportunities or advantageous things that they should be doing right now?

Craig: There are opportunities that they should seize on, but one of the things they have to keep in mind when it comes to gift transfers is that you have to sever all of your dominion and control. You have to part with all of your rights and interests, and so, to make it a completed gift and use your five million, you really have to part with it. One of the things we will look to if taxpayers think they need to have some kind of access to the assets as a grantor retained annuity trust, and it is just what the name implies. A trust is setup, the grantor is the primary beneficiary, an annuity is paid back to the grantor for a certain period of time, and really all you are moving off is the appreciation on the asset base. So, it would give you a chance to freeze your estate, get back everything that you want to get back, but then push the appreciation off to family members.

Sean: And how about you, Eric? Do you agree with that?

Eric: I do, and another idea if cash flow is a concern, this one is an idea for a married couple, particularly where there is a very strong marriage. It has been coined as a Rainy Day Trust. This is a trust set up by one spouse for the benefit of children, potentially grandchildren, but it also provides the other spouse with some limited access. So, it is a way to utilize the $5.12 million exemption, get assets off your balance sheet into this trust, but provide the means to obtain those assets back should that rainy day occur in the future. Another idea would be a self-settled trust. This is a trust that is now allowed in 12 states. It is a trust created by you for you. You name an independent trustee to oversee that trust, and that trustee has the ability to make discretionary distributions back to you. So, again, by funding the trust, you utilize the $5.12 million exemption, get the assets off your balance sheet, but it provides a means to take those assets back should the need occur sometime in the future.

Sean: So, it sounds like there are a couple of options in play here. How would you suggest an individual take advantage of these now?

Craig: Well, actually give it some thought. In the first instance, go talk to their tax advisors, talk to their attorneys, and investigate what is possible given the circumstances that they find themselves in. We found that once we have taken a taxpayer’s concerns into account, that planning can be undertaken, it is just a question of whether they choose to or not, and if you let this opportunity slip, I am afraid there is going to be some remorse for that having let it slip. So, it is time to talk with your advisors now.

Sean: Thinking is always a preferred option.

Eric: Sean, I would agree with that for wealthy taxpayers with large estates. We believe that generally there is always something that can be done while keeping cognizant of some of the concerns for the future.

Sean: And just I guess ending out on that — thoughts about the future, is there anything else beyond the return to these old gift tax limits that you think taxpayers should be aware of?

Eric: Yeah, I would say that the gift and estate tax has been such a political hot button. It is very difficult for us to predict what might occur in the future. I can say, though, at this time that there does not appear to be any serious discussion about repeal of the estate tax.

Craig: In fact, quite the opposite is true. The Obama administration in its last four budgets — all of those budgets have indicated that the estate tax would remain in place. And in this most recent budget, the administration has actually suggested six ideas that would curtail much of the planning that we are capable of doing now, including the grantor retained annuity trust which would see some major constraints placed on it. So, bottom line is there is no time like the present to consider doing some planning. Maybe some of the administration’s suggestions will never make it into law, but they are certainly going to be debated, and out of that debate, is going to come change. So, there is no time like the present to give it some serious thought.

Sean: Certainly, sounds a little foggy on the horizon. So gentlemen, thank you both very much for your time today. Okay, we have been discussing wealth transfer opportunities in 2012 with Craig Janes and Eric Johnson, both partners with Deloitte Tax. If you would like to learn more about Craig, Eric, or any of the topics discussed on today’s broadcast, you can find that information on our website. It is

For all the good folks here in Insights, I am Sean O’Grady. We will you see next time.

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