As we get through the holiday season, probably the last thing on your mind is your estate plan. But the transition period between years provide an opportunity to revisit and reconsider aspects of estate planning, since there are many asset-protecting strategies that can be put in place at this time of year. The following five topics are ones you should post to the top of your to-do-list.
1. Give away tax-free gifts.
The easiest and probably most popular year-end tax planning tactic is making use of a your gift tax exemptions. A married couple has the right to donate up to $28,000 apiece ($14,000 for a single person) to as many deserving beneficiaries as they can find, tax-free for the recipients. This also has the side benefit of moving those assets out of the client’s estate.
Of course, that exemption is purely per year, so if you haven’t made any gifts yet in 2013, now is the time to consider them. One variation to consider: The gifts don’t have to be directly made to a person. They can go to a trust, or into premiums for an irrevocable life insurance trust. A perfectly practical Christmas gift this year could be a sizable donation to a grandchild’s 529 plan.
2. Begin a business succession.
A structured gifting program can also help the transition of a family business. An owner is entitled to give away equity worth up to that $14,000 each year without incurring any gift taxes. That can help make any long-term succession plan smooth, gradual, and subject to a lot fewer taxable events.
It can also allow you to maintain control of the business even while transferring chunks of equity. A gifting program can be used in combination with a family limited partnership or family limited liability company for a full-service transition plan.
3. Schedule an annual meeting.
If you have an established family limited partnerships or limited liability company, even if they exist largely in name only for tax purposes, holding an annual meeting is a great strategy to maintain your security. If one of these entities hasn’t held an annual meeting yet this year, December would be a good time to do it. The IRS looks much more kindly on these organizations if the participants treat them like serious business entities.
4. Set up a GRAT.
Another great option to reduce your tax bill – particularly with stock options or other assets expected to appreciate in the near future – is to establish a Grantor Retained Annuity Trust (GRAT). This is the strategy Facebook founder Mark Zuckerberg used to shave back his tax burden. It transfers the so-called “hot assets” to a family member, but allows the client to retain income from the property and legally avoid any transfer taxes.
The trust guarantees the grantor the right to receive an annuity based on the worth of the asset for a fixed period of time. The appreciation rate for the asset is determined by IRS rules. When the term expires, the beneficiary takes full ownership of the property, free of any taxable obligation.
Zuckerberg had the foresight back in 2008 to transfer $3 million worth of Facebook equity into a GRAT. In 2012, Forbes magazine calculated the value of Zuckerberg’s tax-free transferred asset at $37 million. The clever strategy was not enough, though, to keep Zuckerberg from paying the biggest tax bill in history in 2012, at more than $1 billion.
5. Review your estate plan.
Then there’s the simple matter of reviewing your estate plan to incorporate changes that may have happened over the year. This provides the perfect opportunity to check up on any family changes, financial adjustments, or other life matters that may affect their estate planning.