Wealth-transfer opportunity remains 'best in generation'

If you have clients who have been on the fence about taking advantage of the extraordinary opportunities available to them to engage in significant wealth transfer at little or no gift tax cost, now is the time to encourage them to take action. A combination of factors including historically low interest rates, reduced property values and an enhanced gift tax exclusion make the next two months the best opportunity in a generation to transfer wealth.

Many clients have not taken advantage of this opportunity for a couple of reasons. First, they were hoping for a different election outcome and the elimination of the estate tax. That's not going to happen. Second, they are nervous about gifting significant assets because they might need those assets (or the income from them) to support their lifestyles. Even if the chance is remote that they might need the assets, they are still afraid to pull the trigger.

Here are some strategies to address the "nervous" donor:

Make a gift to a self-settled spendthrift trust in a state that allows for such trusts. The grantor remains a lifetime beneficiary of the trust and can receive distributions from the trust in the sole discretion of an independent third-party trustee. Depending on the facts and circumstances, such a gift will remove the assets from the grantor's estate for estate tax purposes, but still allow the grantor access to funds if necessary.

Sell assets to a defective grantor trust in exchange for a promissory note, SCIN or private annuity. The sale removes the assets form the grantor's estate for estate tax purposes, but provides him with income from the assets he sold to the trust.

Make gift to a defective grantor trust and if necessary in the future, buy the assets back from the trust in exchange for a note. This allows the grantor to bring the assets back into his estate and use the assets as necessary. The assets are included in his estate for estate tax purposes, but because they are included, they receive a step-up in basis at his death. The value of the assets in the estate is offset by the debt owing to the grantor trust and thus are effectively eliminated from the estate for estate tax purposes.

Make a gift to a grantor retained annuity trust and maintain the grantor's required income for a period of years.

Make a gift to a charitable remainder trust and maintain the grantor's required income for life, receive an income tax deduction for 2012, remove the assets from the grantor's estate and receive a charitable estate tax deduction at the grantor's death. Plus, provide funding for worthwhile charitable activities.

Use a defined value clause to fix the value of the transferred assets. Unless the client is giving or selling cash or marketable securities you may not have time to obtain a suitable valuation of the assets transferred. Valuation studies, especially coupled with discounts, take time and most valuation companies are buried. In Wandry v. Commissioner (T.C. Memo 2012-88), the Tax Court held that a "defined value clause" in a gift instrument was effective for determining the gift tax value of the gift. In Wandry, the taxpayer made a gift of a dollar amount, which they reckoned was equal to a percentage interest in their family business. On audit, IRS claimed the fractional interest was worth more than the reported amount and assessed additional taxes. The Tax Court agreed with the taxpayer that he had limited his gift to a dollar amount and that the gift of the percentage in the company was merely the taxpayer's best guess as to the percentage necessary to satisfy the gift amount. Unlike earlier cases there was no charity in line to receive the "excess" gift. The taxpayer merely adjusted the respective ownership shares of the company to reflect the value of the interest.

The current gift and estate tax exclusion is scheduled to be reduced from $5.12 million on Jan. 1, 2013 to $1 million. President Obama's budget for 2013 has the exclusion set at $3.5 million. However that proposal would also include assets held in a grantor trust in the grantor's estate at death (so much for sales or gifts to defective grantor trusts), require a minimum 10 percent remainder value for GRATs and eliminate valuation discounts for family business enterprises. So, 2012 isn't just about taking advantage of the $5.12 million gift exclusion, but also taking advantage of certain strategies to reduce estate taxes, while we still can.

Even though time is running short, it is still possible to advise your clients on taking advantage of this opportunity and implementing a plan before Dec. 31, 2012.

Scott Gunderson is an attorney in Reno and a a Certified Estate Planning, Trust and Probate Law Specialist. Contact him at 775- 354-3593 or through www.scottgunderson.com.