Two years ago seems so short in retrospect. But when the US Congress finally passed what we affectionately called The Bush Tax Cuts, otherwise known more formally as TRA 2010 extending EGTRRA it seemed like two years was a sufficient time to cut down on our tax revenue. Well here we are, two years later and TRA 2010 is set to die on January 1, 2013 at one second past midnight. When you are watching the ball drop in Times Square, you may also hear the stomachs of many of our estate planning clients dropping with it!
The present gift and estate tax exclusions is a hefty $5.12 million. Next year, it will lower to what Dr. Evil thought was a solid number, but we in the modern estate planning world know is a meager $1 million. You can still take advantage of the $5.12 million exclusion this year, but not everyone wants to give away that kind of money just to stop Uncle Sam from collecting a portion of next year’s tax revenue.
Another creative idea is to fund a trust for a living spouse. You can make the spouse the trustee and allow the spouse to make distributions to him/herself. That is such a convenient legal fiction. Setting up the fictitious person trust and allowing a real person to take out money, all the time limiting the money withdrawals to some standard, like using the money for education, housing, health, or basic support. The trust money will be there to help the spouse but isn’t included in the spouses gross estate so their isn’t the same tax analysis. By the way, a spouse isn’t a limiting factor. You can set up the trust to help your children or any other person you care about. Many people refer to this set up as a “Family Trust” or a “Spouse Gift or Gifting Trust.” We are using these types of vehicles to utilize the current law in a way that maximizes the law as it stands today.
If you are really up for the tax avoidance, you can actually complete two separate trusts and shelter for $10.24 million by having each spouse complete an trust for the other spouse’s behalf. There is some complexity in setting up these trusts as we must make sure we don’t violate the “reciprocal trust doctrine.” But there are pretty easy fixes to make that happen and those “fixes” go right into the trust documents.
Again, I speak in terms of “spouses” but in truth, these trusts can be set up by anyone for any other person because the strategy does not rely on the marital deduction. Any two people in a relationship can choose to set up this tax avoidance system. Marriage is optional. So, all my gay friends can quit complaining how unfair the laws are for unmarried couples and just come in and fund your new trust. Then use the money to lobby for a future same sex marriage amendment!
Now, without getting ahead of myself on this trust position, we must also forewarn, that although not likely, in fact we will call it highly unlikely, but certainly within the possibility horizon in the future, the IRS could try and consider the trust transfers to be “gifts” creating a tax burden upon the death of the donor if the donor dies after TRA 2010 is finished. That is a remote possibility and one we are not advising our clients to worry about since the trust still holds up.
But the time it act is NOW. If you are going to move money into a trust you need to have the trust drafted and ready to be in effect and funded prior to December 31st. So, don’t’ wait. Call now to set up your Family Trust.