2012 Estate Tax Planning
Landscape Overview
Presented by:
Justin Ransome and Robert Perez
AICPA Trust, Estate, and Gift Tax Technical Resource Panel
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Speakers' Biographies
Robert Perez
• Principal Shareholder
• Robert Perez LLC
• AICPA Trust, Estate, and Gift Tax Technical
Resource Panel Member
Justin Ransome
• Partner, Washington National Tax Office
• Grant Thornton LLP
• AICPA Trust, Estate, and Gift Tax Technical
Resource Panel Past Chair
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Agenda
Transfer Taxes in 2012
Transfer Tax Planning Techniques
Planning Considerations in 2012
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Gift and Estate Tax – rates and exemption
Gift and estate tax are re-unified
Top marginal gift and estate tax rate is 35 percent
Amount exempt from gift and estate tax is $5 million
• Portable between spouses
• Indexed for inflation beginning in 2012 (5.12 million)
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Gift and Estate Tax – portability
Applicable exclusion amount is sum of "basic
exclusion amount" and "deceased spousal unused
exclusion amount" (DSUEA)
Basic exclusion amount is $5 million, indexed for
inflation beginning in 2012 ($5.12 million)
DSUEA is lesser of
• Basic exclusion amount or
• Excess of
- Basic exclusion amount of last deceased spouse over
- Amount with respect to which tentative estate tax is
determined on estate of that spouse
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Gift and Estate Tax – portability
Susan and John are married and live in a noncommunity property
state. Susan has assets of $2 million in her name, and John has
assets of $7 million in his name. They have no joint assets and
neither has made any taxable gifts. Susan dies in 2011 and
leaves her assets to their children.
John's DSUEA is $3 million – the lesser of:
1. Basic exclusion amount with regard to Susan of $5 million or
2. The excess of $5 million over sum of Susan's taxable estate
of $2 million and adjusted taxable gifts of zero
If John dies in 2012, applicable exclusion amount is $8 million
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Gift and Estate Tax – portability
Advantage of portability is it eliminates necessity to
try to equalize estates of two spouses
If poorer spouse dies first, that spouse's unused
exclusion amount is not wasted
As tempting as it may be to avoid effort to equalize,
it is still a necessity until portability becomes
permanent
As of now portability applies only if first spouse dies
after January 1, 2011 and surviving spouse makes
gifts or dies before December 31, 2012
Portability does not apply for GSTT purposes
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Gift and Estate Tax – clawback
If 2010 Act sunsets and estate tax reverts to
maximum rate of 55 percent and exemption amount
of $1 million, question arises whether taxpayer who
made gifts in 2011 and 2012 lose benefit of $5 million
exclusion amount upon death
Question revolves around what credit amount is to
be used in computing gift tax payable
• Under 2010 Act, it is amount as of date of death
• Under prior law, it is as of date of gift
• After 2001 Act sunsets, Code is to be administered as if 2001
Act "had never been enacted"
• Thus, credit was never more than $345,800
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Generation-Skipping Transfer Tax
Tax rate is 35 percent
GST exemption is $5 million
• GST exemption is indexed for inflation starting in 2012 ($5.12
million)
• Not portable between spouses
2001 Act provisions preserved
•
•
•
•
Automatic allocations to indirect skips
9100 relief for missed allocations and elections
Retroactive allocations for unnatural orders of death
Trust severances for GST tax purposes
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Transfer Tax Status 2009-2013
Estate, Gift and GST Tax Rates and Exemptions
Estate Tax
Gift Tax
Generation-Skipping Transfer Tax
Exemption
Top Rate
Exemption
Top Rate
Exemption
Top Rate
2009
$3,500,000
45%
$1,000,000
45%
$3,500,000
45%
2010
$5,000,000*
35%*
$1,000,000
35%
$5,000,000
0%
2011-12
$5,000,000**
(portable)
35%
$5,000,000**
35%
$5,000,000**
35%
2013+
$1,000,000
55%
$1,000,000
55%
$1,000,000**
55%
*May elect to apply law under EGTRRA (i.e., no estate tax in 2010, carryover basis)
**Adjusted for inflation
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Agenda
Transfer Taxes in 2012
Transfer Tax Planning Techniques
Planning Considerations in 2012
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Transfer Tax Planning Techniques
Outright Gift
Family Limited Partnership (FLP)
Grantor Retained Annuity Trust (GRAT)
Sales to Intentionally Defective Grantor Trust (Sale
to IDGT)
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Outright Gift – overview
Individuals may give up to $13,000 annually without
gift tax consequences
In 2012, an individual may make taxable gifts of
$5.12 million during life before incurring a gift tax
liability
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Outright Gift – advantages
True freeze technique
Removes income and appreciation on gifted
property from estate
Gifts are tax-exclusive (i.e., value of gift does not
include value of tax)
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Outright Gift – example
Evan is divorced and has four children
He has an estate worth $55 million in 2012
Evan gives each of his children assets worth $1.25
million
Evan dies in 2021
Assume that amount excluded from estate tax
returns to $1 million in 2020 and maximum estate
tax rate is 55%
Assume assets grow at 7% per year after tax
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Outright Gift – example
Gross Estate in 2021
Estate Tax
Net Estate
Gift in 2012
Total Estate
Do Nothing
$101,115,257
$55,267,591
$45,847,666
Gift
$91,922,961
$50,916,829
$41,006,132
$9,192,296
$50,198,428
Benefit of Outright Gift
$4,350,762
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FLP
1. Assets
Senior Family
Members
2. Limited & General
Interests
FLP
3. Limited
Interest
Junior Family
Members
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FLP – overview
Partnership created to facilitate transfer of wealth
from one generation to next generation
Transfer tax benefit of creating FLP is reduction in
gift/estate tax value of assets transferred to FLP
when such assets are ultimately transferred to
younger generations
Reduction in value is result of discounts associated
with transfer of limited interests in FLP
Applicable discounts include minority interest, lack
of marketability and/or lack of control
High IRS scrutiny
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FLP – advantages
Control over assets and distributions
Simplifies gift-giving and management of estate
Investment flexibility and efficiency
Asset protection
Valuation discounts
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FLP – example
Evan is divorced and has four children
He has an estate worth $55 million in 2012
Evan transfers $8 million of assets to a family LLC
and gives each of his children a $1.25 million
interest in LLC valued based on 37.5% discounts
Evan dies in 2021
Assume that amount excluded from estate tax
returns to $1 million in 2021 and maximum estate
tax rate is 55%
Assume assets grow at 7% per year after tax
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FLP – example
Gross Estate in 2021
Estate Tax
Net Estate
Gift in 2012 (no discount)
Total Estate
$53,231,886
Do Nothing
$101,115,257
$55,267,591
$45,847,666
Gift of LLC
$86,407,583
$47,883,371
$38,524,212
$14,707,674
Benefit of Gift of LLC
$7,384,220
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GRAT
1. Property
Parents
2. Income Interest
GRAT
3. Remainder
Interest
Children
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GRAT – overview
Estate freeze technique used to transfer
appreciation of assets in excess of section 7520 rate
to younger generations
Value of retained interest reduces value of transfer
to GRAT for gift tax purposes
Value of retained interest may be set equal to value
of assets transferred to GRAT ("zero out") and, thus,
there would be no gift tax consequences of transfer
to GRAT
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GRAT – advantages
To extent assets transferred to GRAT appreciate at a
rate in excess of section 7520 rate over annuity
term, such “excess” appreciation inures to benefit
of remainder beneficiaries free of additional transfer
tax
Because a GRAT is a “grantor trust” for income tax
purposes, all income tax consequences associated
with GRAT are responsibility of grantor, therefore
preserving assets in GRAT that will ultimately pass
to remainder beneficiaries
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GRAT – interest rates
Section 7520 rate (120% of mid-term applicable
federal rate) for month in which transfer is made to
GRAT is “hurdle rate” which assets have to beat in
order for GRAT to produce an estate tax benefit
As interest rates rise, all other factors remaining
same, benefit of GRAT decreases
$55M transfer, 5M gift, 9 year annuity term, 7%
appreciation
Rate
1.2%
2.4%
4.8%
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Amount Removed from Estate
$30,514,709
$26,333,439
$17,605,401
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GRAT – example
Evan is divorced and has four children
He has an estate worth $55 million in 2012
Evan transfers all his assets to a family LLC
Evan transfers his entire interest in LLC to a GRAT with a term
of 9 years and a $5,000,000 present value remainder interest
(based on a 37.5% discount and section 7520 rate of 1.2% (for
July 2012)) which will be distributed to his children upon
termination of annuity interest – Evan will receive an annuity of
$3,462,852 ($5,540,653 undiscounted) per year
Evan dies in 2021
Assume that amount excluded from estate tax returns to $1
million in 2021 and maximum estate tax rate is 55%
Assume assets grow at 7% per year after tax
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GRAT – example
Gross Estate in 2021
Estate Tax
Net Estate
$29,504,934
GRAT in 2012
Total Estate
Benefit of GRAT
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Do Nothing
$101,115,257
$55,267,591
$45,847,666
GRAT
$66,364,743
$36,859,809
$34,750,514
$64,255,448
$18,407,782
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Sale to IDGT
1. Gift “Seed” Property
2. Assets
Parents
3. Note
4. Interest Payments
IDGT
5. Remainder
Interest
Children/
Grandchildren
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Sale to IDGT – overview
Estate freeze technique that involves sale of assets
to an “intentionally defective grantor trust” for an
installment note
Installment note generally set for a term of 5 to 9
years and interest rate set at section 7872 rate
commensurate with term of installment note
Because IDGT is a disregarded entity for income tax
purposes, sale does not trigger income tax
consequences
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Sale to IDGT – advantages
Removes appreciation in excess of section 7872 rate
from grantor’s estate without additional transfer tax
consequences
Greater wealth transfer benefit if property sold to
IDGT is discounted property and distributions from
discounted property can service installment note
Excellent vehicle to transfer wealth to grandchildren
and younger generations
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Sale to IDGT – interest rates
Applicable federal rate for month in which sale takes
place (commensurate with term of note) is “hurdle
rate” which assets have to beat in order for Sale to
IDGT to produce an estate tax benefit
As interest rates rise, all other factors remaining
same, benefit of Sale to IDGT decreases
$5M gift, $50M sale, 9 year note, 7% appreciation
Rate
Amount Removed from Estate
2%$39,137,268
4%$27,159,279
6%$15,181,290
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Sale to IDGT – example
Evan is divorced and has four children
He has an estate worth $55 million in 2012
Evan transfers all his assets to a family LLC and gives a $1.25
million interest in LLC valued based on 37.5% discounts to a
trust for benefit of each of his children
Evan sells remaining LLC interests to children’s trusts for a
$29,375,000 9 year balloon note with interest at 0.92% (July
2012 mid-term AFR) per year
Evan dies in 2021
Assume that amount excluded from estate tax returns to $1
million in 2021 and maximum estate tax rate is 55%
Assume assets grow at 7% per year after tax
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Sale to IDGT – example
Gross Estate in 2021
Estate Tax
Net Estate
Gift and Sale in 2012
Total Estate
Benefit of Sale to IDGT
Tax Section
Do Nothing
$101,115,257
$55,267,591
$45,847,666
Gift and Sale
$32,612,051
$18,295,828
$14,316,223
$68,503,206
$82,819,429
$36,971,763
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GRAT/Sale to IDGT – comparison
Sale to IDGT
Statutorily sanctioned
No
Protection against revaluation
No1
Create without taxable gift
Maybe2
Protection if assets decline in value No
Grandchildren as beneficiaries
Yes
Able to terminate early
Yes4
Balloon payment
Yes
Income tax consequences if grantor Possible5
dies during note term
Amount includible in estate if grantor Unpaid
dies during term
Principal
GRAT
Yes
Yes
Yes
Yes3
No
No
No
No
FMV
of Trust
Advantage
GRAT
GRAT
GRAT
GRAT
Sale
Sale
Sale
GRAT
Sale
1. May use valuation clause to negate gift tax effect of revaluation 2. If seed gift in excess of
credit amount 3. Assuming GRAT is “zeroed-out” 4. Note should allow for prepayment 5.
Questionable whether death triggers gain if note still outstanding
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Comparison
Outright Gift
$91,922,961
$50,916,829
$41,006,132
$9,192,296
$50,198,428
Gift of LLC
$86,407,583
$47,883,371
$38,524,212
$14,707,674
$53,231,886
GRAT
$66,364,743
$36,859,809
$29,504,934
$34,750,514
$64,255,448
Sale to IDGT
$32,612,051
$18,295,828
$14,316,223
$68,503,206
$82,819,429
$4,350,762
$7,384,220
$18,407,782
$36,971,763
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Agenda
Transfer Taxes in 2012
Transfer Tax Planning Techniques
Planning Considerations in 2012
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Planning Considerations for 2012
Large Gift
Interests in Closely-Held Family Business
Grantor Retained Annuity Trust
Sales to Intentionally Defective Grantor Trust
Generation-Skipping Transfer Tax Planning
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Large Gift
Amount exempt from gift tax jumped dramatically
from $1 million to $5.12 million (for 2012)
Increase may be only temporary – December 31,
2012
Gift tax rate is only 35 percent – may revert to
maximum of 55 percent in 2013
Gifts during 2012 eliminate future appreciation in
value of gifted property from transfer taxes
Gift of $5 million in 2012 instead of in 2013 results in
an instant gift tax savings of $2,045,000 ($2,111,000
if gift of $5.12 million)
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Interests in Closely-held Family Business
Increased gift tax applicable exclusion amount of
$5.12 million can be further leveraged by gifts of
interests in closely-held family businesses valued
using these discounts
Discounts for minority interests and lack of
marketability
• Legislative proposals to limit use of discounts for closely-held
family businesses have not been enacted
• Discounts continue to be viable estate planning tool
Even if discounts are legislatively restricted in
future, donor has eliminated value representing
discounted value from transfer taxes
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GRAT
GRATs continue to be valid estate planning tool for
• Wealthy individuals
• Individuals who may again be subject to estate taxes in 2013
and beyond
• Individuals who are subject to state estate taxes
Current low AFR rates to value retained interest as
well as low values for assets to be transferred to
GRATs continue to make GRATs an important estate
planning technique
Legislative proposals to require a 10-year minimum
term GRATs have not been enacted
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Sale to IDGT
Seed money for sales to IDGTs
Traditionally IDGT required to have 10 percent equity
• If funded with $1 million tax-free gift, $10 million of assets could
be sold to IDGT
• Now increase funding by another $4 million tax-free gift, an
additional $40 million can be sold to IDGT when section 7872
rates are currently low – 0.92 percent mid-term rate for July
2012
Additional gift to existing transaction to allow IDGT
to pay off note
President has provision in 2012 budget to eliminate
benefits of IDGTs
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Generation-Skipping Transfer Tax Planning
Utilize increased GST exemption of $5.12 million (for
2012)
Create new trusts to which GST exemption may be
allocated
• If created in state with no rule against perpetuities, trust can last
forever
• Trust will always be exempt from GSTT
Consider late allocation to trust that is non-exempt
or partially exempt
Remember that GST exemption is allocated to trust
based on value of trust at date of late allocation
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