IRS Raises Annual Exclusion Amounts Effective January 1, 2013

Dear Clients, Colleagues, and Friends,

On October 18, 2012, the Internal Revenue Service announced that starting January 1, 2013, the annual amount an individual is able to give to another person free of negative tax consequences, otherwise known as the annual exclusion amount, will be increased from $13,000 to $14,000. When spouses combine their annual exclusions, they will now be able to gift up to $28,000 per individual to as many individuals as they wish without incurring negative tax results. The annual exclusion can be used in many ways, such as providing funding to a child’s college fund, or in conjunction with special trusts to fund life insurance policies to help provide liquidity for potential estate taxes at death.

The annual exclusion is an extremely efficient way to transfer assets to others completely free of gift and estate tax consequences. However, if a gift to an individual exceeds the $14,000 annual exclusion, the taxpayer will be required to file a gift tax return, and the excess will reduce that donor’s basic exclusion amount (the amount an individual is able to gift during life or transfer at death without paying tax to the government). If the donor has already used up his or her basic exclusion amount, there could possibly be gift tax of up to 55% on the excess value of the gift above the annual exclusion amount.

If you wish to further explore your options in regard to how you can most efficiently use your annual exclusions for both 2012 and 2013, please contact our office.

Reminder: There Is Still Time!

The Best Way to Make Use of Your $5.12 Million Exclusion

Before it Goes Away –

The HYCET Trust®

Under our current estate and gift tax regime, the basic exclusion amount (the amount an individual is able to gift during life or transfer at death without paying tax to the government) is set at $5,120,000 per individual, and there is a 35% tax on any assets in excess of that amount. However, these relatively generous numbers are based on law that is scheduled to sunset on December 31, 2012. If Congress does not take action, the basic exclusion amount will return to $1,000,000 per individual with a 55% tax on assets gifted during life or transferred at death above that amount.

As the sunset is currently approaching, the time for taxpayers to take advantage of the $5.12 million ($10.24 million for couples) exclusion amount is now. There will likely never be another time where a taxpayer is able to transfer so much wealth out of his or her estate free of transfer tax, and gifts made before 2013 that make use of the current $5.12 million exclusion are grandfathered regardless of future changes. Although gifting during life can be exceptionally advantageous, with today’s economic climate, many would-be gift makers are afraid of losing complete control and access to gifted assets should future unexpected financial or personal needs arise.

However, through the structure of our firm’s HYCET Trust®, a donor is able to achieve the best of both worlds. The HYCET Trust® allows an individual to take advantage of the high basic exclusion amount now by making a completed gift to the trust, while simultaneously retaining future access to the gifted assets. In other words, the HYCET Trust® gives you the opportunity to “Have Your Cake and Eat it Too”. Some additional advantages of the HYCET Trust® are listed below:

  • All of the gifted assets, including future growth and income associated with the gift, are removed from the donor’s estate.
    • Assuming a 6% growth rate over 30 years, a $5.12 million gift will grow to $29 million, all of which can be transferred to your beneficiaries free from estate or gift tax.
  • Because the grantor of the trust is a discretionary beneficiary, the grantor retains the ability to access the funds through an independent but friendly trustee should the future need arise.
  • Asset Protection:
    • Because the HYCET Trust® will be established in a jurisdiction that recognizes the validity of self settled spendthrift trusts, all discretionary beneficiaries (including the creator of the trust) are protected from future creditor claims.
    • The HYCET Trust® structure can be established in both domestic and offshore contexts.

Don’t miss this once-in-a-lifetime opportunity to engage in tax planning that can potentially result in millions of dollars in tax savings for you and your family. If you have any questions, or would like more information regarding the HYCET Trust® structure, please contact our office.

Jeffrey M. Verdon, Esq.

Jeffrey M. Verdon Law Group, LLP

Posted in Client Alert.