Time Is Running Out: 2012 End of the $5 Million Exemption

The December 17, 2010 “Tax Relief Act” signed by President Obama offered limited time beneficial changes to the estate, gift and generation skipping transfer (GST) tax provision. Specifically, it reduced the estate, gift and GST tax rates to 35 percent increasing and re-unifying the estate and gift tax exemptions. There is a time limitation that ends these provisions relating back to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The 2010 Act provides that all its Estate Planning provisions expire December 31, 2012 in accordance with the EGTRRA sunset provision. Unless Congress enacts new legislation prior to 2013, moderate to wealthy individuals and families need to be made aware of:

1. Using the $5 Million gift exemption to make non-taxable gifts to family members and descendants to reduce the size of their estates and thereby reduce the estate taxation payable upon their deaths.
2. Gifting property in trust. Allocating GST exemption to certain trusts allows the assets in these trusts, together with all future income and appreciation in value to pass to children, grandchildren, and further descendants without imposition of estate, gift or GST tax at any generational level (subject to the rule against perpetuities).
3. Purchasing single premium life insurance policies. If cash is available to use for purchase, life insurance can be gifted to an irrevocable life insurance trust (ILIT). If properly done, this trust can pass insurance proceeds to the beneficiary’s use outside of the decedent’s taxable estate for specific needs.

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