As Window Closes, 4 Key Points on Wealth Transfers

With only four months remaining in 2012, wealth managers should make a point to talk with their affluent clients about wealth transfer plans. The current federal estate, gift, and generation-skipping transfer (GST) tax rules are set to expire at the end of 2012, and the upcoming presidential election has done nothing to improve clarity regarding the future of these rules. The top rate today is 35%, with an exemption of $5.12 million per individual; absent legislative action before the end of the year, the top tax rate will increase to 55% and the exemption will decrease to $1 million on January 1, 2013. At this point, all we can do is act upon what we know. 

The scheduled expiration of current tax rates and exemption amounts will expose many more individuals and families to estate, gift and GST tax liability. Granted, this may be exactly the plan, given the enormous deficit being carried by the federal government. Regardless of political allegiance, most agree that raising revenue through taxation will have to be some part of the solution to the country’s ever-growing budget woes. 

Faced with these pending changes, wealth managers should encourage their clients to take advantage of the unprecedented opportunity to transfer wealth out of their taxable estates at little or no cost. (Clients who take a wait-and-see approach may be in for an unpleasant surprise in 2013.) Because most wealth transfer strategies require time to develop and implement, however, it is of utmost importance that clients take action now. 

Following are just a few key points to cover with clients to help them seize this opportunity: 

  1. As stated above, the low top tax rate of 35% and the significant exemption amount of $5.12 million are set to expire at the end of this year; the new rules call for a top rate of 55% and an exemption amount of just $1 million.
  2. The current White House administration has indicated, through its proposed fiscal year 2013 budget, that it would enact provisions that limit or eliminate the effectiveness of some very popular estate planning strategies. Among these strategies are grantor-retained annuity trusts (GRAT), GST trusts, limitations on discounts applied to intra-family transfers of certain assets, and intentionally defective grantor trusts.
  3. The applicable federal rates (AFRs) are at historical lows. A low-AFR environment enables the structuring of low-cost intra-family loans, which allows for the leveraging of family wealth across generations without incurring gift tax.
  4. Another benefit of today’s low interest rates is the historically low Section 7520 rate—1% as of September 2012. The 7520 rate is used to calculate present values and remainder interests, among other calculations. A low rate is ideal for implementing wealth transfer strategies like GRATs and charitable lead annuity trusts. 

This window of opportunity will be closing soon. Is it possible that Congress will act to extend the current law into next year? I don’t know, but I am not going to hold my breath. Because of the time required to design and implement a wealth transfer strategy, it is critical that clients get started now. Don’t let them wait until the last minute—they need to act while the window is still open. 

Commonwealth Financial Network® does not provide legal or tax advice.

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