It’s Not Over Til It’s Over – How to Capture the Expiring $5.12M Gift Tax Exclusion Even if You’ve Waited Until the 11th Hour (or Month)

Dear Clients, Colleagues, and Friends,

There are only two months remaining before the $5.12M gift tax exclusion law will sunset taking us back to the pre-2011 $1M gift tax exclusion. For those taxpayers who haven’t yet jumped on the bandwagon (to take advantage of what is arguably the “greatest tax benefit” in the history of our Union) time is running short–not because the appropriate trust can’t be timely formed, but because of the extraordinary length of time it is taking the appraisers and valuation discount experts to determine the values of the intended gifts. If this has been holding you back, we have a solution for you.

At Jeffrey M. Verdon Law Group, LLP, we see obstacles not as impediments but as opportunities. For most of our clients who have engaged in the gift planning, we are using the flexible design of the HYCET Trust® (about which we have written in previous issues of our Client Alerts). The HYCET Trust allows you the flexibility of creating a multi-generation dynasty trust capturing the expiring $5.12M gift tax exclusion wherein the donor of the gift may become a discretionary beneficiary of the HYCET Trust, permitting one to retrieve the gift if he or she later develops a case of Donor’s Remorse, or later needs or wants the gift back. Under previous IRS rulings, a gift transfer to a trust established in a qualifying jurisdiction with these characteristics has been treated as a “completed gift” for Federal gift tax purposes. Whether the assets will be excluded from the donor’s taxable estate at his or her death will depend on whether the independent trustee acted in an “independent” manner during the donor’s lifetime. If the donor attempts to exert undue influence over the trustee risks the IRS disregarding the efficacy of the trust. The donor should exhaust his or her personal assets before seeking to recapture the gifts from the HYCET Trust.

If you are just now considering year-end tax exclusion gifts but the type of assets to be the subject of the gift take an extended period of time to appraise or value, such as your closely held business, investment real estate or their entities, your private equity investments, or other assets without a ready market value, no problem. Form your trust and, before year end, simply make a gift of your other assets where the values can be readily determined, like cash, bonds, marketable securities, residential real property or life insurance policies, up to the $5.12M per spouse gift tax exclusion. Then when the appraisals and valuation discounts are completed in 2013, and using the “substitution of assets” clause we insert in our trusts, simply substitute the appraised assets with those assets you originally transferred to the trust in 2012.

So IT’S NOT OVER ‘TIL IT’S OVER using this approach to benefit from this never-to-be-seen again opportunity to capture the gift tax exclusion benefits. We plan to be in the office and working right up until midnight on the 31st of December as we accommodate our clients and their gift planning strategies. If your advisors are telling you it’s too late to do the planning for 2012, we would be happy to work with them to see that you can join the millions of American taxpayers taking advantage of this soon-to-expire tax windfall.

We hope this helps.

Jeffrey M. Verdon, Esq.

Jeffrey M. Verdon Law Group, LLP

Posted in Client Alert.