A Planning Window Without The Pane: Tax Reform Act of 2010

Everyone in the industry knows that until the end of the day on December 31, 2012, a donor can give away that amount without fear of federal transfer taxes.

Comparing the current planning environment to a game is not far-fetched when you consider that this is the seventh time in the last 11 years that the lifetime exemption amount has changed in one form or another, only to be up for grabs again as the heat of the next federal election draws nigh.

The good news is that Congress may have served up a game this time that can actually be won. And any number of other factors make positioning in response to the law even more advantageous. If the term a perfect storm describes the coming together of all worst possible circumstances, then the Tax Reform Act of 2010 and its current environment might be described as a Bermuda high.

Planners should see that their wealthy clients use the present place, time and market factors to achieve previously unattainable margins of victory now made possible by the new exemption.

1. Use the exemption—the prime directive. Gift any assets your client doesn’t need to intended heirs. The lifetime exemption window won’t remain so open for very long. If you are married and can’t give away a full $10 million, then fully utilize one spouse’s exemption first so as to take advantage of the portion by which it may be reduced later.

2. Use the current recession—when less is more. Transfer liquid or non-liquid assets to which a depressed fair market value can be assigned maximizing the power of the exemption.

3. Use potential future performance. Transfer assets with anticipated future appreciation and income, keeping both out of the estate. Transferred assets with a value that is currently depressed could represent an even greater transfer of wealth from the estate when the economy recovers.

4. Use the discount. Consider transferring closely held business interests using minority ownership and marketability discounts perhaps, again, rendered even more effective by low initial valuation due to market conditions.

5. Use a SLAT. Help mollify the “separation anxiety” of married clients who want the tax savings, but don’t want to give up complete access to the property. Use of a spousal lifetime access trust allows transfer of separate property out of the estate where it can continue to benefit a donor’s spouse for his life in matters regarding health, maintenance, education and support. Cross trusts are even possible if client’s counsel takes care to avoid the reciprocal trust doctrine.

6. Use life insurance leverage—part one. Transfer liquid assets that can be used to pay premiums for coverage on the donor. Use the internal rate of return (IRR) illustration application to demonstrate the respectable return on death benefits to advisors who view risk management from an investment perspective.

7. Use life insurance leverage—part two. Don’t overlook that the new law also continued the provision for the unlimited marital deduction. If coverage is purchased in anticipation of estate tax liability, then increase the economy of the purchase with the low premium payments made possible over the joint mortality of two spouses in a last-to-die contract.

8. Use life insurance leverage—part three. We live in a period when we have available lifetime level term in the form of guaranteed universal life (UL) contracts—an animal that is slowly becoming less durable and may become extinct. Consider locking in the cost of the risk portion of an estate plan, especially when it would do well to emphasize with other investment-oriented advisors the surety of the return on death benefit.

9. Use life insurance leverage—part four. If there is a trustee concerned that the cash necessary for sizeable premium commitments might be needed down the road, demonstrate the array of effective life products that allow for a return of premium 10 to 15 years into the policy life, but will still maintain a guaranteed level of desired death benefit coverage.

10. Use the skip, to infinity and beyond. The exemption also applies to the generation-skipping tax. When desirable, use numerous tax-free transfers of life income interests to family tree limbs as remote as allowed by state law.

11. Use the low interest rates. If circumstances don’t permit the outright transfer of assets, use them effectively through private financing or other devices that lock in historically low applicable federal rate (AFR) levels to measure the taxable implications of a transaction.

12. And don’t forget—use the annual exclusions. In the face of the huge exemption amount they may seem like small potatoes, but those increments of $13,000 can add up over the years, especially in situations where gift-splitting and multiple donees abound.

No tax law is ever exactly what we want and we often hesitate to take action on the hope that something better may come along. However, given the unprecedented advantages currently at our disposal, and the members of Congress and a President on the prowl for perceived sources of revenue.

Author’s Bio

Thomas Virkler, JD, CLU
JD, CLU, is director of CPS Advanced Markets, where he assists brokers, as well as other professional advisors involved in casework with clients, concerning matters of estate and business planning, and issues of income and transfer taxation that attend the sale, implementation and administration of a case.

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