There are a number of “quick and dirty” ways to do some year end estate planning to minimize tax liability — especially if you need to get assets out of your estate or if you would simply like to gift this year.
The gift tax rate is 35% this year, and is now set to jump to 55% next year — with the possibility that Congress will retroactively raise the gift tax rate this year to a higher rate. You may be surprised, but yes: Congress has the power to pull a “rope a dope” on all of us by first giving taxpayers a break, but then after a gift is made, retroactively raising tax rates. But also remember: Most of us do not really have to worry about paying gift tax, given the $13,000 per person exemption (and most of us do not gift past that anyway). And on top of the yearly exemption, there is the Unified Lifetime exclusion of $1,000,000.
There is an interesting article in Trusts & Estates, concerning year end gifting using what estate and financial planners know as “Qualified Disclaimers.” A disclaimer is a basic “I don’t want it” response to a gift, where someone’s gift is rejected. If it is rejected, it can flow back to the giver, or to another contingent beneficiary in the event a trust is established. Either way, it can be a way to “have your cake and eat it too,” because you can gift this year (at a lower 35% rate), and if Congress changes the tax rate (or if other circumstances change), the gift may be disclaimed within a 9 month period, and it can come back or go somewhere else. A taxpayer’s version of “touche”!
The Trusts & Estates article gives a specific example:
Take the following example: Tom Clark would like to gift $2 million of marketable securities to his son Bill. He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent. The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio. The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand. Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary. The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses. And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.
I know this is somewhat confusing, but there are a number of non-conventional solutions to estate planning available to all of us, and which are especially useful for the wealthy. For middle income individuals, the conventional solutions are often the best: A Will, powers of attorney, and sometimes (especially if you own real property), a trust.