Brown & Streza Blog
Aug 30

Written by: David Keligian
8/30/2012 11:43 AM  RssIcon

Everyone (especially us at Brown & Streza) is encouraging their wealthy clients to make use of the $5,120,000 per person gift tax exemption which will automatically revert to $1,000,000 at the end of this year. However, some wealthy clients are concerned that even if they have $20 million or $30 million dollars of wealth, gifting $10,240,000 may be too radical a step. They may be concerned about parting with the cash flow generated by the gifted assets.

An excellent solution is an irrevocable gift made by each spouse, in trust to the other. The benefits to this planning, which must be completed before the end of this year, are:

1. First, assuming no “fraudulent conveyance”, the assets in each irrevocable trust enjoy the strongest creditor protection available under California law.

2. Both spouses have made maximum use of available gift tax credits that are probably the highest we’ll ever see. The trusts are drafted so that the gifted assets are excluded from both husband and wife’s estate for estate tax purposes.

3. However, during their lifetime, each spouse may use the income from their trust. This means that if they remain married, husband and wife will collectively retain the same cash flow they had before doing the gifting.

4. If they don’t need the income, the assets in the trusts can build up for the benefit of the couple’s children, passing even more wealth free of estate tax.

5. Having Your Cake in addition, this technique can be combined with discounting and other techniques, so that if desired, the amount of assets that can be transferred free of current gift and future estate taxes can be multiplied even more.

If the transactions are structured properly, both spouses can make use of this technique. As long as the trusts do not run afoul of a rule known as the “reciprocal trust doctrine”, each spouse can make a $5,120,000 gift in trust to their spouse (more if they wish to use discounting techniques). At a minimum, they can take a full $10,240,000 out of their combined estate, yet still retain much of their existing cash flow, achieve asset protection benefits for the assets that are now held in trust, and take advantage of what will probably be the most advantageous rules for transferring wealth free of estate and gift taxes for many, many years.

There are potential risks, of course. For example, if the spouses divorce, the assets that are set aside in each irrevocable trust would probably not be subject to division by the divorce court. However, assuming all of the property was originally community property, it would probably be split equally anyway.

Time is running extremely short to take advantage of this opportunity. That is because, at the very least, the creation and funding of the two separate trusts must be separated by time. If the spouses do not have sufficient separate property, community property must be “transmuted” to separate property. In addition, if discounting strategies are to be employed, additional time is needed to separate various steps, such as forming and funding entities. However, for wealthier clients, the asset protection benefits alone may be worth implementing this strategy.

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