Of course, it is also possible that the current rules could be extended, but there is no assurance that many great tax planning techniques will not disappear eventually. Among the vulnerable techniques are grantor trusts, generation-skipping transfer tax allocations and dynastic trust planning, certain valuation discounts, grantor- retained annuity trusts and more.
What can your procrastinating clients do before the clock runs out?
GIFTS TO TRUSTS
The simplest answer is: Create a trust. Outright gifts are rarely the best choice, and trusts last for a long time. Trusts can protect recipients of largesse in 2012 from their own imprudence, divorce and lawsuits. If you can allocate a generation-skipping transfer tax exemption to a long-term trust, assets in the trust can stay out of the tax system forever, capturing a benefit that is on President Obama's hit list.
For income-tax purposes, trusts should almost always be grantor trusts. This means the client pays income tax on earnings inside the trust. This is a great way to keep reducing a client's estate and enable trust assets to grow faster.
Trusts should often be directed trusts. This means an investment trustee is named and can designate you to continue the money management. Presumably, you don't want to plan yourself out of a good client if you don't have to.
Making this kind of gift cannot be accomplished instantaneously, however. "We've already handled as many trusts in the first half of 2012 as we did in all of last year, which was itself a record," notes Brandon Cintula, senior vice president and senior trust officer of the Alaska Trust Co. in Anchorage. "While we'll bend over backward to help clients get 2012 trusts done, planners should realize that there are a host of steps involved in every plan, each of which takes time."
Near the end of the year, when it might be impossible to complete a new irrevocable trust, gifts may of necessity be made to existing trusts. Old trusts may have more flexibility than some people realize. A trustee might be able, for example, to divide assets into separate trusts or subtrusts. This might permit allocating the generation-skipping transfer tax exemption to the new gift regardless of the status of the old trust. It may be feasible to have a fiduciary relinquish or modify a general power of appointment granted to the children that included the trust assets in their estates. If the trustee has authority to make that into a limited power of appointment, the trustee might then make a late allocation of generation-skipping transfer tax exemption and make a new 2012 gift to the trust. In 2013, the client's CPA would prepare a gift-tax return reporting the 2012 gift and allocating some of the $5.12 million exemption to protect the gifts, and perhaps the value of prior gifts so that a generation-skipping transfer tax will never apply.
Another possible approach might be to transfer assets into an existing family limited partnership or limited liability company and then gift equity interests in that partnership to the children. This can take advantage of the big 2012 exemption, but also provide some measure of protection for the recipient.
Caution is in order, however. There may be estate-tax inclusion issues if the donor is the one who controls certain decisions with respect to the partnership, like the power to control distributions. Partnership interests can provide significant protection from lawsuits faced by the child. The legal structure of the partnership can also prevent the child from having unfettered control over the assets. For example, if limited partnership interests are given to the child, he or she will not have the right to vote or manage the family limited partnership.
Importantly, the partnership agreement can be amended in future years to better tailor the planning. Unlike a trust, a family limited partnership agreement is not irrevocable. There are some complications and traps, however. For example, valuation discounts may be jeopardized if the transfer of assets to the partnership is followed too quickly by gifts of its interests.
The transfer of ownership interests in a closely held family limited partnership or a family S corporation is relatively simple and quick. In general, all that is required is an assignment of the equity interests, new certificates (perhaps) and a revised governing document.