The Exemption to the Rule

Establish a Generation-Skipping Trust. For couples, there’s no better time than now to take advantage of both spouses’ $5 million exclusion—instated with the Tax Act—to establish a generation-skipping trust fund. Specifically for high-net-worth families, the new exclusion provides an exceptional opportunity to pass funds down generations during their lifetime. To further leverage the exclusion amounts, families can fund the trust with assets that have been discounted. Some advisors think Congress may limit valuation discounts in the future.

Take Advantage of Gift Splitting. In addition to establishing generation-skipping trusts, spouses can take full advantage of the Tax Act by coupling the new exclusion with gift splitting. Gift splitting is a tax rule which allows married couples to split a total value as if each contributed half of the amount. It is most useful for couples where one spouse holds most of the assets. This strategy allows couples to increase their total gift exclusion amount by combining individual allowances; with the limited time Tax Act, a couple may gift up to $10 million by gift splitting.

Repair Failed Estate Planning Strategies. Not every estate planning initiative pans out the way you hope. Many techniques do not perform the way they were expected. This current window of opportunity is an ideal time to re-examine past initiatives and use the $5 million exemption to make sizeable gifts to remedy failed tactics.

Create a Family Limited Partnership. Family limited partnerships, or FLPs, are an effective way to manage family assets, while ensuring a tax-efficient transfer of wealth to others. An FLP allows the owners to gift a majority of the partnership to family members in the form of limited partnership interests. Since limited partners have no control in managing the partnership, valuation discounts may be applied for gift tax purposes. It’s important to work with a trusted consultant when it comes to FLPs, as overly aggressive structures that seek high valuation discounts catch the eye of taxation authorities. The value of FLPs has been enhanced in this new Tax Act, since assets may be easily transferred between family members transfer-tax free. The increased lifetime gift tax exclusion also allows you to pass discounted assets such as family businesses, partnerships and real estate.

Leverage Grantor Retained Annuity Trusts. Grantor retained annuity trusts have a specific lifetime and are one of the most transfer-tax-efficient estate planning strategies. When the GRAT is established, the individual is making a gift of the reminder interest in the trust. The GRAT pays the person establishing the GRAT an annual payment for the term of the trust. At the end of the GRAT’s lifespan, the beneficiary can receive the assets, transfer-tax free. GRATs have the advantage of allowing transfers of future appreciation. The Tax Relief Act of 2010 makes GRATs one of the best techniques to shift significant wealth out of taxable estates. Because interest rates are at a low, they are highly effective in transferring assets without incurring out-of-pocket gift taxes.

Transfer Your IRA to a Roth IRA. If your clients won’t need it for personal living expenses in the future, transferring a portion or an entire traditional IRA to a Roth IRA can be a useful estate planning technique. Since there are no minimum distributions, a Roth IRA account can grow larger than it otherwise would in a traditional IRA and clients’ beneficiaries can withdraw from the account free of income tax. Since income taxes are expected to rise in the future, taking advantage of the capped income tax rate is an excellent wealth transfer strategy.

The techniques stated above are just a selection of new options that are more appealing than ever due to the Tax Relief Act. Although acting quickly is important, taking time to discuss all options with a knowledgeable advisor is essential to ensuring that wealth transfer and estate planning initiatives go off without a hitch.