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Using defective trusts to gift $5 million in tax-free gifts

Earlier this year, we wrote numerous posts about the new $5 million gift tax exemption rule. Because the law went into effect at the beginning of 2011 and will stay in place until the last day of 2012, many people believed they had all the time they needed to take advantage of the exemption.

Although two years seems like a great deal of time, it will certainly go quickly. We're already more than half-way through 2011. And before we know it, the holiday season and 2012 will be here. So what does that mean for individuals throughout Kearny? If you think you might exceed the $5 million exemption, it is important to think about ways in which trusts and other estate planning tools can help minimize your tax penalties.

For individuals who are interested in taking advantage of the gift tax exemption, there are numerous options available. However, for clients who have a great deal of wealth tucked away, a defective trust may be a good option to consider.

An intentionally defective grantor trust (IDGT) capitalizes on two main elements. Like many other trusts, property that is transferred with an IDGT is considered complete for gift and estate tax purposes.

However, the person who is gifting the assets, the grantor, is still considered the owner - hence the term "defective" trust. As a result, the grantor will still be responsible for any income tax liability associated with trust assets.

As the grantor pays tax liability, the trust grows without accruing any taxes. In addition, as the individual pays taxes, he or she reduces the size of his or her taxable estate.

In essence, an IDGT allows individuals to give gifts worth $5 million that are essentially tax-free. We will discuss IDGTs more in upcoming posts. However, if you have specific questions about your situation, it may be advantageous to call an estate planning lawyer.

Source: AdvisorOne, "Estate Planning: Time Running Out on $5 M Gift-Tax Exemption," Gavin Morrissey, 15 June 2011

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McCurrie McCurrie & McCurrie, L.L.C.
680 Kearny Avenue
Kearny, NJ 07032-3010
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