Transfers to a Completed-Gift Asset Protection Trust
by Edward D. Brown
The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRA 2010”) was enacted on December 17, 2010. TRA 2010 allows gifts of up to $5 million without incurring any gift tax. If one is married, the $5 million can be doubled to $10 million if the couple gift-splits. Unfortunately, the provisions of TRA 2010 sunset at the end of 2012. So, without further Congressional action, on January 1, 2013, the lifetime gift tax exemption reverts to $1 million ($2 million for couples). There are planning strategies that should be considered during this possibly small window of opportunity. One of those strategies is the use of a completed-gift asset protection trust.
Very few “asset protection trusts” that exist today were designed to remove assets from the settlor's (i.e., creator‘s) taxable estate. This opportunity has huge beneficial ramifications. Such a trust not only allows the trust assets to be removed from the settlor’s estate without paying a gift tax (a “completed-gift” trust), but also protects the assets of up to $10 or possible $15 (see below) million from the client’s future unexpected creditors.
One can now transfer up to $5 million (or $10 million for couples that gift-split) to a completed-gift trust without incurring a gift tax. The ability to transfer even a higher amount, such as $15 million, to the completed-gift trust can be accomplished if the transfers involve assets held in a family limited partnership or family limited liability company, which benefit from valuation discounts (at least until Congress succeeds in its continuing efforts to pass legislation to take away this discounting ability).
If the tax law reverts at the end of 2012 to only a $1 million lifetime tax exemption, anyone who had made the transfers of $5 million or $10 million (or more with discounting) in 2011 or 2012 may have already successfully removed these amounts (plus appreciation) from their estates during the allowable small window of opportunity.
Furthermore, if the estate tax is repealed (and if the settlor no longer has a desire to keep the asset protection in place), the trustee of the completed-gift trust could return all the trust assets to the settlor, provided that the trustee decides to do so in its own independent initiative as opposed to being due to any influence asserted by the settlor.
Considering the above, the settlor can not “lose” either way, whether the estate tax law stays as is, whether the estate tax law returns to its harsher prior status, or even if the federal estate tax is ultimately repealed.
If any details are desired regarding this planning strategy, please feel free to contact its author, Edward D. Brown, Esq., Engel & Reiman pc, by telephone at 303-741-1111, Ext 110 or by e-mail at e.brown@engelreiman.com.
About the Author: Edward D. Brown specializes in estate planning, taxation, and business transactions and planning. Mr. Brown is also a Certified Public Accountant. He will be speaking at the Estate Planning Update Seminar in Cheyenne, Wyoming. Read more.
