Congress May Reduce the $5M Gift Tax Exemption Before End of 2011

Dear Friends, Colleagues, and Clients,

The rumor mill has been spinning regarding potential looming changes to the current $5M gift tax exemption.

We have learned that the Congressional super-committee is seriously considering an imminent change to the gift tax rules. For a variety of reasons, this is a compromise the republicans appear willing to accept.

If a majority of the committee members agree, there will be an immediate reversion back to 2009 gift tax rates and a reduction back to a $1M gift exemption, effective by the end of November. Within some professional tax advisory circles, there is a lot of activity now to close large gifts before Thanksgiving. The fear, expressed privately with clients, is that the change will take place in the form of a bill, which will then get an immediate up or down vote in the senate. If passed as expected, it will be enacted as part of a deficit reduction measure. This will not be retroactive, nor prospective. So, if a taxpayer did not make a $5M gift by then, the ability to do so will be lost. If so, the client will be grandfathered.

This would be the time to consider the firm’s HYCET Trust platform.

The HYCET Trust would allow a taxpayer to form a completed gift trust, and make gifts of up to $5M before the law would change. Unlike traditional completed gift trusts, the HYCET Trust could be designed to include the taypayer and spouse as discretionary beneficiaries. This would permit the access to the Trust’s assets without causing the value of the gifted assets to be included in his or her taxable estate. Why is this important? The following chart illustrates the value of removing a $5M asset from the estate now and having it appreciate in the HYCET Trust during the taxpayer’s lifetime outside of the taxable estate:

Example: $5M transferred in 2011 and death occurs in 2041 (30 years)

  • Growth @ 3%/yr – $12M is excluded from estate
  • Growth @ 6%/yr – $29M is excluded from estate
  • Growth @10%/yr – $87M is excluded from estate

In traditional gift planning, the taxpayer must relinquish the use and benefit of the gifted asset for a completed gift to occur. However, the firm is using a uniquely designed trust, based on current gift tax law and IRS rulings, to create a trust in which the taxpayer can make a completed gift and retain a beneficial interest in the trust so the taxpayer could gain access to the gifted assets should future financial circumstances change. Thus, the taxpayer can Have Your Cake and Eat It Too – Hence: HYCET Trust

There are specific rules that must be followed, but we have found for most of our clients, the rules are quite manageable when compared to the benefits to their estate planning.

Given the potential for an earlier reduction of the gift tax exclusion, we are encouraging our clients and friends to decide if making the gift through the vehicle of the HYCET Trust makes sense for their planning.

For information about this most important planning opportunity, please contact the law firm for a consultation.


Jeffrey M. Verdon, Esq.

Jeffrey M. Verdon Law Group, LLC

Posted in Client Alert.