Shirley M. Mueller, MD
Shirley M. Mueller, MD
Shirley Mueller, MD is a physician turned financial consultant and investment educator who specializes in guiding clients, both one-on-one and in groups, about how to effectively self-invest using a simple and effective three-step approach

Clock Is Ticking on Gift-Tax Exemption

Estate planning can be tricky in this volatile political and economic environment, but one thing is almost certain: In December 2012 the current $5 million federal gift-tax exemption for individuals will likely be reduced to $1 million or even less.

Failing to take advantage of this short-lived tax break could impact your relatives substantially. For example, if you are single and die today with a $5 million estate, all of it will be passed on to your heirs’ free of federal gift tax. (Even your state inheritance tax could be lower because of it.) Your heirs will be sad you died, but happy about the munificent inheritance.

On the other hand, if you pass away on Jan. 1, 2013, or later, your heirs will receive substantially less. After the $1 million exclusion (or possibly less), the remainder of the estate could be taxed up to 55%. Again, your heirs will be sad you died, but the financially savvy ones will wonder why you didn’t do more to shield your assets.

How can you do that now? Through the use of a domestic asset protection trust (DAPT), a completed gift to an irrevocable trust for the benefit of the grantor’s spouse and children. This type of “rainy day protection” can be accomplished under Alaska, Delaware and Nevada law, among other states.

The whole scenario gets more complicated, of course, when both husband and wife need to be considered and not just one spouse. The news is even better here: Because the gift-tax exemption is $5 million for each spouse, and the unused tax exemption available to the surviving spouse is “portable” and can be used during his or her lifetime after the death of a partner, the total exemption is $10 million for a couple until Dec. 31, 2013.

There are several cautions here. There is some talk that there could be a “claw back” argument by the Internal Revenue Service when the estate-tax exemption reverts to something below the current generous level in 2013.  This would be particularly disheartening if someone had spent the money and the time to set up a domestic asset protection trust. According to Tim Bender, a lawyer at Bingham McHale LLP in Indianapolis, this is unlikely to occur.  “This would be like a bait and switch by the government,” he says. There is also some in the estate-planning community that do not recommend DAPTs for various reasons. For those considering setting up this kind of trust, these cautions should be examined. 

Also, please note that I am not a lawyer and therefore those that might find a DAPT appealing should see a legal counsel. 

All of this means that setting up a DAPT is not to be taken lightly. Still, single individuals with $5 million in assets, or couples with $10 million in assets, may find it is to their emotional advantage to explore this alternative. Then, they will know when they pass that they have done everything they could for their heirs -- and their heirs will know that too. 

This information and content is offered for informative and educational purposes only. MyMoneyMD LLC is not acting as a Registered Investment Advisor, Investment Counsel, Tax Advisor, or Legal Advisor.