The Tax-Free Transfer Ends With 2012

High net-worth investors have only the remainder of 2012 to transfer $10 million to their potential heirs tax-free. Andrew Friedman, of The Washington Update, wrote a 10 page paper about this unique opportunity. Friedman’s reported that Congress chose to increase both the estate tax and the git tax exemption to $5 million (now $5.12 million to account for inflation) allowing for $10 million (or $10.24 million) tax free transfer. The current law also allows for generation skipping-transfers. This provides a significant advantage over the rules that will take affect at the end of the year. These rules will only allow a $1 million exemption.

Friedman’s paper also explains the potential benefits and problems in choosing different estate planning options. He argues that while some investors might want to transfer assets to an irrevocable trust, however, this could create some estate tax issues. He asserts that the most beneficial option would be to take your assets and invest in a life insurance policy. This would allow an investor to obtain the earnings of life insurance policy, tax free.

An investor could also take advantage of tax free benefits by acquiring an irrevocable life insurance trust (ILIT) or by choosing to invest the assets of a trust into an annuity. Both assets allow the earnings from their investments to remain tax free. In the case of the annuity, the assets must remain in the annuity to take advantage of the tax free benefits. Both options will provide a constant stream of income, which would be advantageous to the beneficiary even if that person does not need a constant source of income. Remember, to take advantage of these principles, an investor must make the transfer by the end of 2012. 

See Gil Weinreich, Estate Planners: 9 Months Left for Tax-Free Transfer of $10 Million, AdvisorOne, Mar. 30, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.