Wipfli Alerts & Updates: Wealth Transfer Opportunities May End Soon

September 7, 2011
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Last December’s eleventh-hour tax bill created a historic and potentially limited window of opportunity to transfer wealth during life to younger generations with little or no transfer tax cost. Unfortunately, our nation’s volatile political and economic climates may close that window by the end of next year. As a result, we recommend clients consider the attractive and creative planning opportunities available today when they can reap the benefits.
Increased gift tax exemption.  In 2010, individuals could give up to $1 million during their life to individuals other than their spouse or charities. We call this your lifetime exemption amount. In addition, you could (and still can) give up to $13,000 per year to an unlimited number of individual donees (subject to certain restrictions). We call this your annual exclusion amount. Once you exceed your lifetime exemption a 45% tax rate applies to gifts over and above your annual exclusion amount. In 2011, the lifetime exemption jumped to $5 million per donor, and the tax rate fell to 35% on gifts above that amount. In addition, the amount that you can transfer to generations two or more below you (e.g., grandchildren, great-grandchildren, etc.) also increased to $5 million. However, absent congressional action, the lifetime exemption will return to $1 million in 2013, and the tax rate will rise to 55%. Thus, this year and next present a wonderful opportunity to give larger gifts at little or no gift tax cost.
In addition to the tax benefits of the strategies highlighted below, please note that many offer significant non tax benefits such as possible asset protection, probate avoidance, and others. Attractive lifetime gifting techniques available today are:

  • Increased outright gifts of cash or property to children, grandchildren, etc.
  • Increased gifts to fund future education costs (e.g., 529 plans, UTMA/UGMA accounts, etc.)
  • Increased life insurance policies either owned by or transferred to an Irrevocable Life Insurance Trust (ILIT)
  • Intrafamily sale of assets (e.g., real estate) on an installment-sale basis
  • Forgiveness of intrafamily debt without income tax consequences
  • Roth IRA conversions
  • Creation and funding of a dynasty trust to preserve wealth for multiple generations with little or no tax cost
  • For closely held business interests, in particular, consider: 
    • Grantor retained annuity trust (GRAT)
    • Installment sale to a defective grantor trust (IDGT)

Please contact Pam Schneider, Ryan Laughlin, or your Wipfli relationship executive if you have any questions.

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