By: Randall A. Denha, J.D., LL.M.
For over a decade, the future of the federal estate tax has been uncertain. Both Republicans and Democrats have sharply different strategies, with some calling for an increase in federal gift and estate taxes and others advocating for total elimination. Even if you have never done estate planning, this year is a good time to start. Remember that in 2001, Congress increased the estate tax exemption in measured steps until December 31, 2009. Everyone assumed there would be comprehensive reform, but Congress failed to act.
However, one thing is sure, for the remainder of 2012, each individual can transfer up to $5,120,000 million free of gift tax or leave up to that amount tax-free to anyone he chooses at death. Assuming an individual plans to live through the remainder of the year, the lifetime giving option is the most viable. At the very least, individuals should consider making gifts of their annual exclusion amount ($13,000 per donee in 2012 and increasing to $14,000 as of January 1, 2013) or gifts on an unlimited basis for tuition and/or medical expense payments. Such gifts can be made over and above the gifts that will take advantage of the gift tax exemption.
Despite having a multitude of gift giving strategies to choose from, many clients are still reluctant to make transfers for various reasons. Whether due to possibly needing the money again or distrusting the beneficiary or the environment the beneficiary operates under, an individual sitting on the sidelines failing to take advantage of this once-in-a-lifetime opportunity will miss the train if this gift is not made before year end. A technique that should alleviate the concern of this type of individual that hasn’t received much press (but should) is the Disclaimer Gift Trust.
What is a disclaimer? A disclaimer is a refusal by a beneficiary of a gift or bequest. What makes a disclaimer possible is that a disclaimer, if properly accomplished, is not a “transfer.” Under the Internal Revenue Code, without a “transfer” there cannot be a gift. Put another way, gift taxes are only imposed on “the transfer of property by gift.”
Say you feel pressured to capitalize on the current $5,120,000 million gift-tax exemption, but, for many reasons, you wouldn’t otherwise make a gift this year. One way to allow yourself the ability of making the gift and still having time to decide what to exactly do is by utilizing the Disclaimer Gift Trust concept.
For example, before the end of calendar year 2012, you can make a $5,120,000 gift to your spouse. Should Congress decide to extend the $5,120,000 exemption, your spouse can continue to retain the money in trust on a tax free basis or pass some or all of it vis-à-vis a “disclaimer” and pass it to the beneficiaries. The money is still in the individual’s family unit and no harm done.
However, if Congress allows the exemption to expire and its reduced from $5,120,000 to $1,000,000, then your spouse can either still keep the money, or, better yet, “disclaim” the gift within nine months of the date of such gift. If your spouse decides to disclaim the gift then the gift continues in trust for your beneficiaries and is treated as a gift from you and not your spouse. In effect, the gift that was disclaimed is governed by the same rules that existed when you made it. Your spouse is not treated as ever having received it.
This technique effectively buys you an additional nine months to decide whether or not to give your beneficiaries a gift under the current gift tax rules which are only in effect until December 31, 2012! The catch for a Disclaimer Gift Trust to work is that your spouse cannot touch the money in trust while you wait and the donee-spouse must disclaim it within nine months of receiving the gift, otherwise the disclaimer becomes invalid. This disclaimer option only works with a spouse, and, needless to say, one you feel confident won’t divorce you, take the money, and run.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.