Written by Estate Planning Attorney, Charles E. Davis

On December 17, 2010, the Federal Government enacted the 2010 Tax Act. Once again, this changed the estate, gift and generation-skipping transfer (“GST”)[1] tax rules. But the changes are only temporary and end in December 2012 without Congressional action, which appears highly unlikely this year.  Until then, however, there is a tremendous opportunity to take measures that could result in thousands to millions of dollars in tax savings. For many clients, even those with reasonably moderate estates, we believe they will be well served by taking advantage of the current law before its expiration on December 31, 2012.


At the end of this year the tax laws revert to the rules that applied in 2001. The gift and estate tax exemptions return to $1,000,000 on January 1, 2013, and the maximum gift and estate tax rates will increase from 35% to 55%.  Until then, however, the estate and gift tax exemptions will be $5,100,000 per person.  Therefore, a husband and wife through judicious planning can eliminate any estate tax, up to $10,200,000. After 2012, however, unless Congress acts, using traditional estate planning techniques, we will only be able to shelter up to $2,000,000, for a married couple, and $1,000,000 for an unmarried person from the estate tax, which as noted increases to 55%.  If no planning is done, on a $2,000,000 unmarried person’s estate, the government could take $550,000 in estate taxes (the first million is exempt, the second million is taxed at 55%).


 Below, I detail some of the strategies available to our clients to take advantage of the increased gift and GST tax exemptions before they are lost.  Which strategies are best for you, depends on a number of factors: the size and make-up of your estate, your current financial needs, the needs of your beneficiaries, and other family-centric situations. In calculating the potential size of your estate, don’t forget to include insurance.




Typically, charitable remainder trusts are used to place funds in a trust that will pay out monies to the donors until either the death of the people creating the trust, or for a certain number of years. If it is for a specified number of years (and the maximum is 20 years, by law) there may be gift taxes to pay. With the higher gift tax exemption, there is an opportunity for planning the trusts in such a way that sufficient cash will flow to the donors and their family and capital gains taxes can be deferred while eliminating estate and gift taxes.




A Spousal Gift Trust is an irrevocable trust created by one spouse for the benefit of the other spouse and/or other family members.  Gifting assets to such a trust removes the assets and their appreciation from your taxable estate.  If you are married, a gift to such a trust can be particularly attractive because your spouse can be the primary beneficiary of the trust.  This allows the assets to be removed from your taxable estate while still being available to your spouse. (You do not benefit directly, but benefit indirectly through your spouse). With careful planning and some restrictions, each spouse can create and fund his or her own Spousal Gift Trust so that each can use their respective $5,000,000 gift exemption.  In addition, if you choose to allocate GST exemption to the gifts to a Spousal Gift Trust, the trust assets and their appreciation can also be removed from the GST tax system for as long as the trust exists, meaning that the assets will pass free of estate taxes for two or more generations.  (Children and Grandchildren)  This Trust also offers significant asset protection for a client and his or her family.




Generally, a person cannot create a trust for the benefit of himself/herself, receive asset protection and lock in the use of his $5,000,000 gift exemption.  However, certain states, such as Nevada, have enacted laws where it may be possible for you to make a gift to an irrevocable trust and include yourself as a beneficiary of that trust (and still remove the assets from your taxable estate when you die and remove the assets beyond the reach of your creditors).   Such a structure may be desirable if you want to maximize your gifting while the gift tax exemption is $5,000,000 but you are reluctant to part with assets due to future uncertainty.  Making gifts to a self-settled trust can prove to be the tool to overcome these psychological barriers.  The law governing both the ability to create such trusts and their effectiveness for tax and asset-protection purposes is still evolving.  And there are a number of professionals who have raised questions about the effectiveness of such trusts.  Great care and special consideration must be used before utilizing a self-settled trust.


However, the IRS recently has given guidance on this planning.  Generally, the donor cannot have a pre-arranged or underlying agreement as to the distribution of assets from the self-settled trust.  Ultimately, the primary benefit of a self-settled trust is to allow you to make a tax efficient gift while providing distributions to yourself if circumstances warrant.  This trust also offers significant asset protection for a client and his or her family.  This self-settled trust planning is available even if you are not a resident of these favorable states by selecting a Trustee who is a resident there.


Generally, if there are other avenues to accomplish your goals, where the law is more settled, we encourage our clients to utilize those vehicles.




A dynasty trust is a trust that is designed to benefit multiple generations (children, grandchildren and great grandchildren) by continuing to hold property in trust for each generation with the assets in the trust not being subject to estate tax or GST tax.  The increased gift tax exemption and GST exemption under the 2010 Tax Act present an excellent opportunity to fund a dynasty trust using the increased gift tax exemption and allocating the GST exemption for the benefit of descendants. These Trusts also remove the assets beyond the reach of creditors.


Establishing a dynasty trust in Arizona potentially enables three or more generations to benefit from these assets without any estate tax consequences at any level.




A Qualified Personal Residence Trust (“QRPT”) is designed to be a tax-efficient means of transferring a personal residence to specific beneficiaries.  The concept of a QPRT is relatively simple: the owner of the personal residence transfers it to a trust but retains the right to live rent-free in the residence for a specified number of years.  At the end of that period, ownership of the residence is transferred to the beneficiaries (or a trust for their benefit) and is removed from the estate of the original owner.  At that time, the original owner can rent the property from the beneficiaries if he or she wishes to remain in the house.


The tax advantage of the QPRT comes primarily from the way in which the value of the residence is calculated for gift tax purposes.  The value of the gift is not the full value of the residence on the date of the gift because of the discounts that the tax law permits on deferred gifts of this type.


However, no matter how a QPRT is structured to reduce the gift, the gift will still be substantial. 




Because of low interest rates, the use of Grantor Retained Annuity Trusts (“GRATs”) has become very popular.  GRATs allow you to transfer certain assets to your beneficiaries at a discounted gift tax value.  This is because you retain the right to receive payments from the GRAT for a certain number of years before the GRAT terminates in favor of your beneficiaries.  With the increased gift exemptions, GRATs may allow clients to design a GRAT with a lower annual payment, while using the gift tax exemption to cover the value of the remainder interest for your beneficiaries to avoid gift tax.




Other strategies, such as the use of family limited partnerships or family limited liability companies, and sales of fractional interests may also be available to accomplish your family and tax goals.


Because time is short to accomplish some of the better strategies, please call our office today to schedule an appointment. 

[1] The GST tax, taxes transfers that would otherwise skip generations. For example if you left assets in trust for the benefit of all of your posterity for the next 500 years (which you can do in Arizona), the Federal tax law imposes an additional tax on such transfers.