The Promises of the New Transfer Tax Rules?

“…I now ask you to give me the benefit of the doubt when I tell you that we are right smack in the middle of the most dynamic and exciting period for estate planners in the history of the republic. The combination of opportunities that currently exists to enable our clients to move substantial wealth to or for the benefit of their children, grandchildren and more remote descendants, has never been seen before. We’re in the eye of the perfect storm of estate planning.” The Perfect Storm, by Charles A. Redd, Trusts and Estates, January 2012.


And I completely agree! And in my agreeing, I will throw in my usual caution: this window of opportunity is not for amateurs. 


For most of last year, the commentators and pundits have had a field day talking about Portability under the new transfer tax law. There was a blog article some months ago, one of many, by a CPA firm that seemed to be all atwitter about how friendly this is for the taxpayer. They were celebrating that now one could leave his entire estate outright to his surviving spouse and at her later death there’d still be no tax because the survivor gets the benefit of both spouses' exemptions. 


Maybe!  


There are some very dangerous pitfalls in this new law, to say nothing of the fact that the whole thing goes away and reverts to pre 2006 rules at the end of this year! That alone will be a complete devastation for people who’ve not considered that likelihood and have avoided tax planning because there was a $5,000,000 exemption plus portability which implies there is no longer a need to “use it or lose it.”  For portability to actually work, there are filing requirements that people will be unaware of and won’t think to ask about because they believe they owe no tax. And second marriages can completely destroy the portability concept as the surviving spouse may have it pictured.


While this law is definitely a boon for those who are wary enough to plan carefully, it is a trap for the unwary. 


Taxes aside, there are many reasons to engage in quality estate planning such as asset protection and wealth reception. And there are planning strategies that take advantage of the benefits of the new law while providing protection if it doesn’t last.   


Beneficiary access trusts, (carrying many different looks such as Build-Up Equity Retirement Trusts, and Beneficiary Deemed Owner Trusts, and Marital Deduction Trusts, to name a few), should be considered. They are advanced concepts and require a skilled planning professional, but they offer the ability to retain the use of assets and income while avoiding the inclusion of the asset in the taxpayer’s estate and also providing a good measure of asset protection from creditors and predators. 

Portability and other concerns can all be dealt with inside of these trusts, and if the law reverts to a much lower exemption, clients have the benefit of a significantly reduced taxable estate and didn’t miss the great opportunity of taking advantage of the higher exemption amount before it went away.


 As an example, consider two trusts: one for Husband and one for Wife. Each is funded by property gifted by the other and when properly drafted, each taxable estate will not include the property in either trust. 


There you have it in a nutshell: flexibility in uncertain times if we take advantage of today’s opportunities.