This post is not just for the super-wealthy.
It is about creating a spousal gifting trust this year 2012 for married couples who have longer-term assets between $2.0 million to $5.12 million that they wish to preserve, particularly against the threat of future estate tax. The essence of this 2012 planning is that one spouse places up to $5.12 million of assets in a trust with the other spouse as the primary beneficiary.
This spousal trust — based on its specific design features — is the factor that eliminates future estate tax on this gifted trust property after both spouses die. Either one or both spouses can be trustees of the trust. The trustee can thereafter hold, invest, and buy / sell the trust’s assets (on behalf of the trust). Thus, there will be no estate tax on this trust (nor on the appreciation in value of its assets) when each spouse dies.
There is a deadline. This planning must be put into place before the clock strikes 12:00 midnight December 31, 2012. The $5.12 million exemption drops to $1.0 million beginning January 1, 2013.
Also, this ideally is for assets not needed for day-to-day expenditures. There, otherwise, generally is no sense in structuring estate planning for assets that most likely will be consumed or spent during lifetime.
As an example, a spouse with $2.3 million of longer-term assets can take advantage of the above gift exemption with the result that this $2.3 million (including future growth in its value) is no longer subject to estate tax at each spouse’s death.
By contrast, and for this example, beginning January 1, 2013 and without this spousal trust planning the married couple will face the potential of estate tax to the extent their $2.3 million assets at death (plus appreciation) exceed each spouse’s $1.0 million estate exemptions.
For readers who want more details: This trust can be designed as a generation-skipping-transfer (GST) dynasty trust that also includes the couple’s children and the children’s descendants.
And, of critical importance, the above spousal trust planning can include limited powers of appointment in the trust document for the beneficiary spouse — as well as for the children — that they each can trigger later if necessary so as to provide the donor spouse with income or principal from the trust.
This next point is extremely important. The above powers of appointment cannot be based on an up-front, formal or informal, agreement that the powers are to be used with definite assurance in order to get trust income and principal back to the donor spouse. Otherwise, the IRS can argue the donor spouse did not have the requisite intent to make the gift in funding the trust, thus negating this planning.
For income tax purposes, this spousal trust can be designed so that no separate trust income tax return is required. This means all trust income, losses, deductions of the trust continue to be reported on the personal income tax return Form 1040 for the married couple.
Finally, a key point. You need to review whether taking advantage of this year’s $5.12 million exemption can provide the estate-tax free result illustrated above. This may be a once-in-a-lifetime opportunity to set aside the worries about future estate tax.