2012 Year End Planning – Don’t Let Your Carriage Turn Into A Pumpkin

We all remember from the story of Cinderella how she was given a great opportunity to attend the Prince’s ball, but that the magic would wear off at midnight.  With just over two months left in 2012, this year appears to be the estate planning equivalent of the Cinderella story.   Under current law, before the clock strikes midnight on December 31, every American can transfer up to $5.12 million free of federal gift, estate and generation-skipping transfer tax.  If Congress does not act by the end of this year, the exemption in 2013 will be just $1 million.  This exemption, when coupled with historic low interest rates and valuation discounts, mean families can transfer significant assets at little or no tax.Consider the following scenario.  A farmer has land valued at $2 million.  The farmer holds the land in a limited liability company (LLC).  As part of his succession plan, the farmer desires to make a lifetime transfer to his son.  By giving an interest in the LLC, the farmer can claim a discounted value on the asset transferred.  Assume the farmer is able to claim a discount of 30%, a gift of one-half of the LLC (valued at $1 million without any discount) would only be “valued” at $700,000.  The farmer has transferred $1 million worth of assets, but only used $700K of his gift exemption.  Now assume that over the next twenty years the value of that 50% LLC interest increases by another $500,000.  All of that growth happens outside of the estate of the farmer.Whether your estate is $100,000 or $100 million there may be opportunities that will be lost when the clock strikes midnight.  No one can predict what will happen in the upcoming elections and no one knows for certain whether the current exemption amounts will disappear.  My advice to clients is not to gamble that the prince will come with the glass slipper, but to head the warning of the fairy godmother that the carriage will turn into a pumpkin.  Take advantage of the opportunities that exist today and don’t just hope that they will be around next year.If you would like to learn more about gifting and the techniques discussed in this post please contact me at info@hallock-law.com.