To Plan or Not to Plan: Rip Van Taxes

Happy Thanksgiving! Yahoo Finance has this article about the coming “fiscal cliff” and some people’s race to do year-end estate and tax planning, while others are brushing off the tax planning opportunity and waiting to see what, if anything, Congress will do.  While the estate, gift, and generation-skipping tax exemptions are likely to be at the highest point in our lifetimes and the rates are probably at historic lows, the article  points out that maxing out your exemptions may only really matter if you’ve got $10 million of spare assets to give away in trusts. Anecdotally, many estate planning attorneys are seeing clients with $5 million+ estates setting up irrevocable trusts this year, but many middle class clients aren’t as concerned about looming tax increases. The article correctly notes that the estate tax “is not a tax on everyone, it’s a tax on people [with substantial assets] who aren’t paying attention.” Whatever you’re stance on the fiscal cliff and taxes, don’t be caught unprepared for the changes ahead like Rip Van Winkle.

So if you don’t have $5 million+ in assets, why bother with estate planning? Well, if you’re a high risk professional (accountant, architect, attorney, doctor, executive), asset protection is an issue. Maybe you’ve recently gotten married, divorced, or had a child. Or maybe you’re like most clients we work with who want to ensure their family’s taken care of and a surviving spouse and children don’t have to deal with a legal and financial mess after a loved one’s passing.

Whatever your estate planning motivations or needs, we can help. Our office, Johnson Law KC LLC, has years of collective experience doing estate planning, ranging from simple wills for individuals and young couples to complex dynasty trusts and advising on how best to transition the farm or family business. Give us a call (913-707-9220) or email (steve@johnsonlawkc.com) and we’ll schedule a convenient appointment to serve your estate planning needs.

(c) 2012, Stephen M. Johnson, Esq.

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“It’s Beginning to Look a Lot Like Christmas”: Give $10.24 Million to Your Family, Tax Free

The NYT has this interesting article profiling Jonathan Blattmachr and his wife, Betsy, and their estate planning strategy. Blattmachr is one of the nation’s most preeminent estate planning attorneys and a tax law expert than many attorneys, accountants, and others read for advice on navigating the complex labyrinth that is the IRS Code. He’s a classic example of the Type A personality who immerses himself in the materials of a particular topic and then declares with certainty (often to others’ bemusement) that he’s absolutely certain if you do X, Y will occur. Most attorneys, accountants, and other estate planning professionals are smart, analytical, and risk averse; Blattmachr is the proverbial smartest guy in the room who believes (and often convinces others) that he’s devised a solution so ingenious that despite the critics’ howls and groans, it’s flawless and incontrovertible. And he’s usually right: his work holds up well under IRS attack.

Estate planning attorneys across America have been encouraging affluent clients to max out their $5.12 million lifetime gift tax exemptions before Dec 31, 2012 (since the exemption falls back to $1 million on Jan 1, 2013) (pardon the cheesy title, but clients are well-advised to take advantage of these historically high exemptions). And because of a(n IRS approved) technique called “split gifting,” if you’re married, your $5.12 million individual exemption is actually $10.24 million. So far so good, right? Well, as the article mentions, there’s an old tax law ghoul called the reciprocal trust doctrine. And the reciprocal trust doctrine says if a husband and wife set up trusts with identical terms that make each other beneficiaries and trustees, the IRS can step in and pull the plug, and tell the couple that their clever estate planning is undone and the $10.24 million gift (designed to remove assets from their estates) is now back in their estates (and taxable at the 45%+ estate tax rate). The reciprocal trust doctrine prohibits the wink wink nod nod, quid pro quo, I’ll scratch your back if you scratch mine estate planning strategy in irrevocable trusts. But there are ways around the reciprocal trust doctrine.

To avoid the reciprocal trust doctrine, attorneys vary the terms of the trusts. We (1) set them up at different times, (2) name different beneficiaries, (3) name different trustees, and otherwise vary the terms to make them materially different.

If you’re looking to set up trusts for your family and descendants, sell or transition your small business, or do other estate planning before 2013, time’s running out. Our firm, Johnson Law KC LLC, has experience advising individuals, families, small business owners, and entrepreneurs in all facets of estate planning – whether simple or complex – and we can handle your other legal needs as well. Give us a call (913-707-9220) or email (steve@johnsonlawkc.com) if we can be of service to you.

(c) 2012, Stephen M. Johnson, Esq.