Excerpt from: Joshua Tree Enterprises LLC (click for full article)
At present,
clients and their estate planning advisors are contemplating making
$5,120,000 taxable gifts (or twice that amount using the split gift
election) before year-end because the gift tax exemption may revert to
$1,000,000 (FN2)
starting in 2013. Before making the maximum taxable gifts for the
remainder of the 2012 year, clients need to be made aware of the
possibility that maximizing their taxable gifts can cause a financial
hardship if the gifts are made to grantor trusts. Before making such
gifts, clients and their advisors need to take into account the
financial impact caused by the grantor having to pay the income taxes on
the grantor trust's taxable income and take precautionary steps if
those projections show that the income tax treatment will not leave the
grantor with sufficient assets for support in their later years.
This article is designed to show that for individuals with a life
expectancy of over 20 years, making the maximum taxable gifts may not be
the optimal strategy. In evaluating whether to take advantage of the
$5,120,000 gift tax exemption for the rest of the 2012 year, one needs
to take into account the ages of the clients, their living expenses and
the amount of their income-producing assets. The situation illustrated
below shows that for a couple ages 62 and 59 with $46,000,000 of
investment assets, they should not make the maximum $10,240,000 in
taxable gifts to a grantor trust.
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