Wealth Management in the United States is an ongoing, ever-evolving practice. The complex problems confronting clients involve local, federal and international tax, estate planning, trust and estate administration and dispute resolution laws and regulations. The Wealth Management process focuses on creating and implementing an integrated planning structure that will accomplish the client's objectives in a tax-efficient and predictable manner. High net worth individuals turn to professionals for unique, holistic solutions that respond to their personal and estate planning needs and family governance wishes.
Succession planning is a key component to Wealth Management for business owners and wealth creators. Moving beyond managerial succession, legal advice centers on restructuring business entities and other holdings in a manner that achieves efficient wealth transfer and cohesive management across generations.
The most pertinent developments in Wealth Management over the last twelve months include:
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
On December 17, 2010, President Obama signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Act) that temporarily extended the Bush tax cuts for 2011 and 2012, and increased the gift, estate and GST tax applicable exclusion amounts for that period to an historic high level of $5 million. Rumors abounded during 2011 but the year came and went without Congressional action. Clearly no accurate or even well-informed predictions can be made. Gifting now rather than waiting can only be to your advantage.
Federal Estate, GST and Gift Tax Rates
The 2010 Act reunifies the gift and estate taxes for the first time in years. The applicable exclusion amount for each of the gift, estate and GST taxes is $5 million with a top tax rate for each of 35%. For 2012, the $5 million is indexed for inflation and is $5.12 million. In 2013, without further Congressional action, we will revert back to the 2001 exemption of $1,000,000 and the top tax rate of 55%.
Annual Gift Tax Exclusion
The amount of the Annual Gift Tax Exclusion is $13,000 per donee in 2012. Thus, a husband and wife together can gift $26,000 to each donee. The amount of the Annual Gift Tax Exclusion with respect to gifts made to non-citizen spouses increased from $136,000 to $139,000 in 2012.
President’s Budget Proposal for Fiscal Year 2012
The President’s budget proposal for Fiscal Year 2012 includes three transfer tax-related items that were proposed in each of the past two years and two new items dealing with estate and gift taxes.
Consistency of Basis Valuation The proposal to require consistency in value for transfer and income tax purposes requires that the basis for income tax purposes be the same as that determined for estate and gift tax purposes.
Eliminating Certain Valuation Discounts The budget proposal adds a new category of “disregarded restrictions” that would be ignored for transfer tax valuation purposes in valuing an interest in a family-controlled entity transferred to a member of the family.
Grantor Retained Annuity Trusts (GRATs) to Be Subject to New Rules Three additional requirements would be imposed on Grantor Retained Annuity Trust (GRATs): (i) they must have a 10-year minimum term; (ii) they must have a remainder interest greater than zero; and (iii) the annuity amount cannot decrease in any year during the annuity term.
Make Portability Permanent The budget proposal seeks to make portability of any unused applicable exclusion amount when the first spouse dies permanent.
Limiting the Duration of the GST Exemption The exclusion from the imposition of GST tax would last only 90 years, regardless of whether a trust has a longer duration.
Planning Opportunities to Consider Immediately
• Make outright gifts to take advantage of reduced gift tax rate and increased applicable exclusion amount
• Make gifts with retained interests to domestic asset protection trusts of which you and/or your spouse are discretionary beneficiaries
• Have husband and wife create trusts for each other
• Create grantor retained annuity trusts (GRATs) while hurdle rates are at historic lows
• Make sales to “defective” grantor trusts while the applicable federal interest rates are at historic lows
• Create charitable lead annuity trusts (CLATs) while hurdle rates are at historic lows
• Gift residences or vacation homes using qualified personal residence trusts and other trusts while real estate valuations are depressed
• Consider buy-back of appreciated low basis assets from grantor trusts
• Make intra-family loans, including to purchase life insurance, while interest rates are at historic lows
• Consider creating or amending existing family limited partnerships consistent with the latest case law developments this year
Offshore Voluntary Disclosure Initiative
Admittance to the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) was extended indefinitely. With some exceptions, taxpayers accepted into the current OVDI program pay a penalty of 27.5% on unreported foreign assets, plus an accuracy penalty, back taxes and interest. Taxpayers who have not entered the OVDI but who want to disclose unreported offshore income should contact a professional to consider entering the IRS Voluntary Disclosure Program.
Foreign Account Tax Compliance Act of 2009
On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act (HIRE), which contained a version of the previously proposed Foreign Account Tax Compliance Act of 2009 (FATCA). These provisions are intended to combat offshore tax evasion by U.S. taxpayers by requiring increased information reporting.
HIRE provides for withholding taxes to enforce reporting requirements on certain foreign accounts owned by specified U.S. persons or U.S.-owned foreign entities. Generally, a tax equal to 30% must be withheld by a U.S. withholding agent on any withholdable payment made to a foreign financial institution (FFI) if the institution is not a “participating FFI.” A “participating FFI” has an agreement (an FFI Agreement) with the IRS under which the institution agrees to obtain certain information on each U.S. account holder and comply with various reporting and withholding requirements. The withholding of 30% is on a broader category of U.S. source income than is captured under the current withholding rules. Based upon widespread concern expressed around the globe, certain aspects of implementation have been deferred.
In addition to the withholding regime described above, FATCA also requires new reporting for U.S. owners of specified foreign financial assets, enhanced reporting for U.S. shareholders of passive foreign investment companies and imputation of income for the uncompensated use by U.S. beneficiaries of trust-owned real or tangible property.
In February 2011, the Financial Crimes Enforcement Network (the FinCen) issued final regulations regarding the filing of Form TD 4 90-22.1 Foreign Bank Account Report (FBAR), which clarify when U.S beneficiaries, trustees and settlors must report interests in foreign trust accounts.