The New Estate and Gift Tax Act
By Jeff Reed
On December 17, 2010, the President signed into law the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010 (Act), revising the income, estate, generationskipping
transfer (GST) and gift taxes for 2010, 2011 and 2012.
For 2010, the Act retroactively imposed an estate tax at a 35% rate with a $5 million exemption
and a GST tax at a 0% rate with a $5 million exemption.
This law increased the amount a taxpayer may gift on a tax-free basis from $1 million to $5
million per donor. This new tax benefit is only available until the end of 2012.
Why is this new tax law important? If a 60-year-old taxpayer makes a gift (ex. real estate) of
$5M in 2012, and the average return on investment (ROI) is 6%, in 30 years the taxpayer has
effectively transferred $29M free of estate tax. A ROI of 10% will result in $87M being
removed from the taxable estate in 30 years. However, once the clock strikes midnight on
December 31, 2012, the amount of tax-free gifts reverts back to $1M.
A married couple owns income-producing real estate inside a LLC generating a cash flow of
10% per annum. To take advantage of the generous but temporary gift tax exclusion and remain
consistent with their overall estate tax reduction strategy, the couple wants to take advantage of
the new gift tax exclusions but realizes that making a gift will not allow them to regain the
benefit of the cash flow should their future financial circumstances change.
The couple establishes an irrevocable trust in a qualifying jurisdiction (such as Nevada) and
selects an independent but friendly trustee. The trust is established to include the couple’s
children and grandchildren as primary beneficiaries. Pursuant to the recent IRS rulings, the
couple also includes themselves as discretionary beneficiaries of the trust so that should they
need financial assistance from the trust, they are in a position to receive it.
Let’s examine what the couple has accomplished:
¢ Utilized the $5M exclusion before it expires after 2012
¢ Removed an appreciating asset from their taxable estates without any gift tax
¢ In 30 years, almost $90M of value is removed from their estates “ gift and estate tax
¢ If the couple should end up in a position where they need the income from the trust,
the trustee may make such distributions without causing the value of the trust’s real
property to be included in the couple’s taxable estates
¢ Because Nevada is an asset protection trust state, the property and the income held in
the Irrevocable Trust are protected from lawsuits, divorcing spouses, and liability
¢ Lower Estate Taxes- Current gifts are grandfathered, regardless of future changes
¢ Asset Protection
¢ Grantor can be discretionary beneficiary without losing tax benefits
¢ Greater Leverage
¢ Use LPs or LLCs to create discounts to leverage gift
¢ 35% to 40% discounts
¢ Using CMS (Capital Maximization Strategy) may turn $10 million into $50
million- or more!
¢ The following rulings permit Grantor:
¢ To create an irrevocable trust
¢ Retain a beneficial interest
¢ Complete Gift
¢ IRS Revenue Ruling 76-103
¢ Private Letter Ruling (PLR) 9332006
¢ Private Letter Ruling (PLR) 200944002
¢ You have a one year window. The joint lifetime gift exemption has been increased to
$10,000,000. Law sunsets December 31, 2012 – reverts back to $2,000,000.
For more information on the new Estate & Gift Tax Act please contact Jeff Reed at 949-444-
8570 or email [email protected]. Web site www.nafep.com/jeffreed.htm.