The unified, lifetime federal gift and estate tax exemption in calendar year 2012 is set at $5.12 million. The federal lifetime exemption for the generation-skipping transfer tax (GSTT) is also $5.12 million in 2012. These are the highest exemption amounts in decades. In 2013, these exemptions are scheduled to go back down to $1 million, and the maximum estate and GST tax rates will increase from 35 percent to 55 percent.
Calendar year 2012 might be the last opportunity for individual United States taxpayers to move millions of dollars into an irrevocable dynasty trust without incurring punitive gift taxes, and to ensure that future generations of trust beneficiaries receive benefits free of GST taxes. Given current and projected political and fiscal conditions, exemptions for the gift tax and GSTT will probably not be this favorable again for a long time.
An irrevocable trust can be funded with cash, real estate, stocks, bonds, hedge fund interests and virtually any other type of valuable asset. An irrevocable trust can own (and manage) any type of property, including a family business, life insurance and variable annuity policies, and other investment vehicles. When an individual trust grantor (settlor) donates particular property to an irrevocable trust, he gives up formal control over the property. In return, the grantor is able to dictate to a large extent how the trust assets are managed and used, now and in the future, to accomplish his immediate and long-term goals. In other words, the grantor surrenders some degree of control during his lifetime in return for a large degree of future control. Further, assets in the trust are protected against personal creditors of both grantor and beneficiaries.
Finally, an irrevocable trust funded with assets to which gift tax and GST tax exemptions have been allocated allows an individual to build a legacy that passes to his children and future generations to enjoy, maintain and enhance. The unfortunate but inevitable alternative for assets outside of a trust is to be eviscerated by punitive and predatory estate taxes, which force descendents to cannibalize the family business or other legacy at each generation and to pay taxes over and over again.
Not all assets are well-suited for donating to an irrevocable trust. For example, a personal residence owned by a trust but inhabited by the grantor might be viewed by tax authorities as an incompleted gift and, therefore, still within the grantor's estate. On the other hand, home equity could be turned into cash, which could then be gifted to an irrevocable trust.
Of course, estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.
In view of the uncertainty in tax laws and of the erratic nature of lawmakers in the United States, any individual having assets totaling more than $1 million should fund an irrevocable dynasty trust in 2012 to take advantage of the current $5 million gift and GST tax exemptions. Even individuals having $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.
Warning & Disclaimer: This is not legal advice.
Copyright 2011 - Thomas Swenson
Thomas Swenson practices law in the areas of asset protection, business planning and intellectual property.
Among his specialties are the design and implementation of offshore dynasty trusts holding private placement life insurance (PPLI). In full compliance with U.S. tax laws, an irrevocable, discretionary, offshore PPLI dynasty trust provides a life insurance benefit, tax-free investment growth, asset protection against all creditors, financial security, and perpetual tax-free enjoyment of trust assets by beneficiaries.