estate tax

2012 Income/Estate/Gift Tax Update

Wondering about the state of the estate taxes and other tax brackets in 2012 (compared to 2013 if Congress does nothing this year to prevent this from happening)?  Take a look at the following chart:

U.S. Taxes 2012 v. 2013

2012 Top Tax Brackets

2013 Top Tax Brackets

Income Tax



Estate Tax



Capital Gains Tax






Generation Skipping Tax





2012 Exemptions

2013 Exemptions

Lifetime Estate Tax Exemption

$5.12 million

$1 million

Gift Tax Exemption

$5.12 million

$1 million

Generation Skipping Tax Exemption

$5.12 million

$1.3 million

What should be jumping out at you upon seeing this chart?

Firstly, barring action by Congress, many people need to be addressing their estate plans this year.  This is a golden opportunity for planned giving fundraisers to encourage inclusion in wills and other estate plans knowing that this is a year that people should be making changes.

Secondly, individuals potentially facing estate taxes should be considering significant gifting to heirs this year to take advantage of the $5.12 federal estate/gift tax exemption, as well as possibly using the generation skipping tax exemption this year.  For planned giving fundraisers, the 2012 gifting options might open opportunities for gifts like lead trusts.

There will definitely be changes to all of the numbers in the above chart either before the end of 2012 or sometime in 2013.  In the meantime, anyone concerned about estate taxes will still have to take action, just in case.

My advice to the planned giving world is to educate your donors and prospects on the estate planning flux were are currently facing, and keep pushing the bequest and other planned gift messages more than ever.  How often to people change their estate plans?  Usually  not often…except maybe for this year or next.

Follow-up to “Charitable Freeze” piece: understanding “discounts”

My last piece (click here)  on the so-called “Charitable Freeze” plan got so many viewers that I think we need a short follow-up.  These types of complexities even cause me to glass over so getting the basics down first will help everyone understand the plan.

The key to understanding the Charitable Freeze is “discounts” – a term of art, of course.  “Discounts” is a term that is used commonly in an estate planning/gifting context.  In short, it is method for transferring assets at reduced values for reporting purposes.

Typically, planners will use a 30% discount when transferring assets/shares that are held in an entity (LLC, LLP, etc…)  that entitles the transfer-or (i.e. rich parent) to claim that the assets/shares are worth less for “lack of marketability” and “lack of control”.

In other words, the recipients (i.e. kids) receive shares from an LLC or LLP – which are really worth the face amount but they have no ability to sell because good old dad holds those strings as the general partner or manager of the entity.

So, that $1 million in UPS stock that Mrs. Petter just put into her LLC, and then transferred the shares to her daughter gets reported as a $700,000 gift to her daughter (not the real value of $1 million).

Back to the Petter Case which confirmed that the Charitable Freeze works (for now).  Mrs. Petter took a 51% discount!  On the same $1 million example, she would only report a $490,000 gift to her daughter – nice deal for Mrs. Petter.

Taking a 51% discount is clearly a case of egging on the IRS to do battle.  The so-called safe harbor (i.e. not likely to be challenged) is 30%.

My experience – and I am guessing the far majority of world – is that people do not like to go into financial plans knowing that it is highly likely that for the plan to succeed, it will need extraordinary amounts of LITIGATION!

So, back to the Petter Case and the Charitable Freeze.  The Petters’ planner put in place an extremely aggressive discount – with a clause that prevents the IRS from actually collecting any more tax dollars should the IRS defeat the excessvie discount taken (funds going to charity instead – like a retroactive gift to charity that kicks in when the IRS beats you in court).

It may have paid off, but I wonder how much was spent in the litigation.  And, just because they won, doesn’t mean others will and it doesn’t mean that the IRS will back off challenging aggressive discounts.

So, the verdict on Charitable Freeze is: buyer beware!

The State of Estate Planning

I know that I might be breaking my promise not to over-blog but readers should know by now that when there is something important happening in the nonprofit world in planned giving, I am going to say something.  And, of course, the question I always ask myself is what can I add to this discussion that others are missing?

So, here is my short take on the estate/gift/gst changes from the Tax Relief Act of 2010 (aka The Please Re-elect Me/Us Act of 2010) with a focus on info fundraisers should be aware of  (note – if you like this, I have to give credit to a few colleagues who made some improvements to my original draft; if you don’t like it, blame it on me):

Estate Tax Law Overhaul

Trusts and estates attorneys, financial planners and even fundraisers have been anxiously waiting for something to happen with the estate tax for years.  Actually, 10 years to be exact, as no one in the field believed we would ever reach a year of estate tax repeal – which we did in 2010.

Now that we have a change in the law, its incumbent on us to find out what we now have for an estate tax system.

The following is a summary of the relevant points from the Tax Relief Act for those working in or around the nonprofit community, particularly planned giving and major gift fundraisers:

  • This is only a two year fix. Yes, in another two years we are going to be back where we started. The only question will be which party is in a better position to impose its will.  Stay tuned for a rerun of the same planning uncertainty when 2012 winds down and we are again facing a return to the 2001 estate tax laws of 55% highest federal rate and lifetime exemption of $1 million.
  • Husbands and wives, combined, can pass $10 million to heirs without a penny of Federal estate tax ($5 million per person estate tax exemption). This sounds extremely generous but individuals always need to be wary of their home state’s estate tax, which can be as much as 16% (like New York).  The new tax law also reinstates something called the State Death Tax Credit, which is the equivalent of giving states a payment of 16% of federal estate taxes collected – which may spur many states to reduce or eliminate their current estate taxes.
  • Estate planning for spouses just became much simpler. Under prior estate tax regimes, it was very important for couples with total assets above the lifetime exemption amounts to do careful estate planning to preserve each others’ lifetime exemption.  This typically required marital exemption trusts and/or separating ownership of joint assets.  The Tax Relief Act now allows executors to apply any unused portions of a pre-deceased spouse’s lifetime exemption toward the surviving spouse’s estate.  This greatly simplifies estate planning for spouses but individuals will need guidance from the estate planning community on practical applications of this new provision.
  • The “unified” gift and estate tax is unified again. Individuals once again will have the option of gifting during life or waiting until their passing to use up the $5 million lifetime estate/gift tax exemption.  Additionally, the law unifies the generation skipping tax with estate and gift taxes.  In theory, this means that a grandparent can gift up to $5 million to grandchildren without incurring any gift, estate or generation skipping tax liability.  The tax rate for all three types of taxable gifts, once the $5 million exemption is used up, is 35%.  It is worthwhile to note that many individuals may be advised to make generational transfers under the $5 million exemption during this two year window – with the potential for more uncertainly looming ahead.

While these points may seem applicable only to non-charitable estate plans, the nonprofit world should be informed of these law changes for several reasons.  Firstly, donors will want to hear from planning professionals about the new state of estate taxes so there will be opportunities to bring your supporters together for seminars on related topics.  Secondly, donors will be revisiting their estate plans, presenting a good opportunity to be included in a donor’s estate plan.  Lastly, education of donors in the best practices of estate planning – one of the prime planned giving marketing techniques – will be more relevant than ever in ensuring that charitable intents are realized.

And, for those interested more details – there may be a few of you – check out this most recent post from Attorney Martin Shenkman’s website:

His summary confirmed my thought that this new law is not the end of uncertainty – actually, it’s the beginning of a whole new era of uncertainly in estate planning.

Tax Policy: How Much Impact Can The New York Times Have?

For those of us who have followed tax policy (as it relates to the general area of planned giving),  it seems like the best way to light a fire under Congress’ you know what is a front page article in the New York Times (Wall Street Journal even better).

So, we can’t help wondering if the front page article in today’s NY Times about a billionaire who unexpectedly died this year (and thus avoided billions of dollars in estate tax) won’t push Congress to do something about the estate tax this year.

Here is the link to the article:

What this article fails to highlight is how much capital gains taxes may eventually come out of this estate in lieu of estate taxes.    Basically, heirs traded down from a 45% federal estate tax in 2009 to a 15% capital gains tax in 2010.  But, the capital gains are not necessarily paid this year – they are due when the appreciated property is sold.  For all we know, that could come in many years but could also be at a higher rate (most likely 20%).

The article does, to its credit, address probably the most important part of the story:

Very deep pockets to challenge any government attempt to retroactively impose an estate tax for 2010 decedents.