In 2011, Uncle Sam gave you the
Best Estate Planning Gift
in history.

In 2012 it got better

In 2013 it goes away

Now, more than any time in history,
a lifetime gifting strategy can provide
more estate and gift tax savings.


Click to see how

2012: The perfect storm for estate planning

  • The
    gift tax exemption
    (the amount you can give away, without owing a dime in federal gift tax), is
    the highest it has ever been
    $5,120,000.
  • The top
    gift tax rate
    , on amounts above the exemption, is the
    lowest it’s been since 1931
    35%.
  • In 2013, the perfect storm may be over.
    Absent congressional action, the exemption drops to $1,000,000 and the top tax rate rises to 55%.
  • This
    may be the only time
    that you can pass on so much to whomever you wish; and pay so little (or nothing) to the Federal Government.
Exemption in Millions
Tax Rate Percent


 
YEAR
EXEMPTION
TOP RATE
START
1977
$120K
70 %
STOP
2013
$1M
55 %

In 2012, you can
give away more
and pay less

now and at estate tax time


But, is this for me?
  • You do not need to be extremely wealthy to take advantage of the current tax rules from Uncle Sam.
  • Do you have assets in excess of $1M that you can afford to give to the next generation now? Then, you can begin to see the benefits of this estate tax reduction strategy – the larger the gift, the better.
  • What kind of assets? How about a business where you have a child as the heir apparent? Or, real estate? Or, growth assets?

Let’s look at the benefits of
gifting in action


Build a scenario that you’d like to see illustrated
1. Select a character for the story:

2. Pick a few details about Ben :

Age:


Relationship status
3. Now for some financial information:
Ben has an Estate Value of
He is seeking to make Gift to his kids of:
4. Go to the Next Page to see the Results…

Meet Ben...

He’s a single father of two (Steven and Jessica). He is 55 and semi-retired. He has an estate with a value of $5M made up of his $1M family vacation home in Florida and a $500K rental property in New York, with the rest in his personal residence, investments, personal property and a sailboat. He has a very close relationship with his kids.

The Gifts in 2012

Since Ben rarely goes to the vacation home anymore (his kids use it more than he does), he gives it to Jessica. Ben gives the rental property to Steven because he doesn’t need the income and no longer wants the headaches.

The Result

If Ben were to die in 2013, and assuming a 4% growth on all assets, the IRS would receive $243,000 less in estate taxes! That amounts to a increase in the amount Ben passes to his children. And, it just gets better over time! If Ben were to die ten years later, in 2023 (see graph), the IRS receives $655,050 less (16 % more to the kids)!

Even Steven

What about Ben’s son, Steven? Did he come up short on his inheritance? Through the use of a straightforward life insurance trust, with Steven as the beneficiary, Ben funds a $500,000 permanent life insurance policy.
Ben's Benefit
Final Tally in 2023

$655,050

increase through 2012 gifts

16 %

$637,317

increase through gifted life insurance

15 %


$1,292,367

total increase to the kids

31 %

Why gift as part of an estate plan?

The gift – and the growth on the gifted assets – are outside of your estate at estate tax time. In 2012, your gift can be BIGGER than ever.
NO GIFT
GIFT
2012
 
Ben's Estate
$5,000,000
$5,000,000
 
Assets Gifted
0
1,500,000
 
Remaining Estate
$5,000,000
$3,500,000
Estate and gift assets grow at 4% until Ben's death in 2023
2023
 
Ben's Estate
$7,697,270
$5,388,089
 
Estate Taxes (@ 2001 Rates)
3,528,499
2,873,449
 
Net Estate
$4,168,771
$2,514,640
 
Value of Ben's 2012 Gift
0
2,309,181
 
Total Amount to Heirs
$4,168,771
$4,823,821
Increase to Heirs
 
$655,050
Result:
More to your heirs and less to Uncle Sam

Want to change Ben's scenario
Estate Value:
Age:


Gift Amount
Relationship Status
Ben gave away $1.5M without taxation. In 2013 and beyond, $1M is the maximum.
Taxed at lowest rates since 1931.
Ben's estate is smaller. Therefore, the amount taxed at the higher 2001 rates is smaller.
The 4% growth on the original gift occurred outside the estate; avoiding estate taxes.
NET RESULT OF THE GIFT (Ben's AND Uncle Sam's): 16 % more to Jessica and Steven

Life insurance and estate planning

While life insurance is commonly used to provide liquidity to pay estate taxes at death, it can also be used to equalize inheritances when illiquid assets (e.g., real estate) are gifted.
TO JESSICA
TO STEVEN
2012
 
Ben's Gift
$1,000,000
$500,000
 
Life Insurance on Ben for Steven
0
500,000
 
Total Benefits to Heirs
$1,000,000
$1,000,000
Estate and gift assets grow at 4% until Ben's death in 2023
2023
 
Value 2012 Gifts
$1,539,454
$769,727
 
Insurance Death Benefit
0
750,000
 
Value of Gifts
$1,539,454
$1,519,727
 
Total Value of Gifts
$3,059,181
 
Net Estate (from previous screen)
2,514,640
 
Net Cost of Premiums
-112,683
 
Total Amount to Heirs
$5,461,138
Increase Due to Life Insurance
$637,317
Combined Benefits of Total Plan
$1,292,367
Result:
Even more to your heirs

Want to change Ben's scenario
Estate Value:
Age:


Gift Amount
Relationship Status
Ben uses an Irrevocable Life Insurance Trust (ILIT) as the policy owner, keeping the $500,000 out of his estate.
Ben immediately increases his gift to his kids from $1,500,000 to $2,000,000.
The life insurance has an increasing tax-free death benefit, helping it keep up with the growing value of the gift to Jessica. Even Steven.
Ben makes gifts to the ILIT, which are used to pay premiums. This is the net result on the estate of Ben's ILIT gifts. (more)
NET RESULT OF THE INSURANCE: Adding insurance to Ben and Uncle Sam’s gifts generates another 15 %.
NET RESULT OF THE TOTAL PLAN: From 'No Gift' to a 'Gift with Insurance,' Ben has given 31 % more to Jessica and Steven.
Ben gifts $50,000 to the ILIT in 2012 and $13,000 per year thereafter – totaling $180,000 in 2023. The ILIT uses the funds to pay the premiums on the life insurance policy. By removing $180,000, and the growth on that amount, from his estate, Ben saves estate taxes, resulting in a net cost of $112,683.

Uncle Sam’s
estate planning gift

goes away in

Your American General financial professional can help…

At American General Life Companies, we have been helping meet the needs of wealthy individuals and families since 1850. Along with a competitive, innovative and varied product line, American General offers its representatives best-in-class, advanced market support and services – such as this website – to help provide you with the information and expertise you need.

IMPORTANT INFORMATION


ABOUT THIS WEBSITE:

Objective:

The intent of this website is to communicate the potential benefits of lifetime gifting and its impact on an estate planning strategy. It is important to understand that, although every effort was made to ensure the accuracy of the calculations in this web application, the application should not be perceived as a planning tool. The site is for illustrative and educational purposes only. To determine whether a lifetime gifting program is appropriate for your situation, you should seek the advice of tax, legal and financial advisors.

Assumptions:

In order to simplify the presentation of this topic, several assumptions were made. Please review them, below:

1. Growth Rate: The growth rate for this website was locked in at 4% for all assets: those gifted and retained. Of course, this is unrealistic and could even be regarded as aggressive, considering the economic environment that began in the late-2000s. No one can accurately predict the growth of assets. Additionally, classes of assets can grow at significantly different rates. Ideally, one looking to reduce their estate tax exposure would gift assets with a higher growth potential (see About Lifetime Gifts section below). Before considering a lifetime gifting strategy, a thorough understanding of the growth potential of an estate’s assets is necessary.

2. No Prior Gifts Made: The examples in this website assume that no prior gifts were made by Ben or Karen. Prior gifts (over an annual exclusion amount) will reduce the amount of the exemption available for current and future gifting.

3. Level Annual Exclusion Amount: In the portion of the website’s calculations addressing annual gifts to an Irrevocable Life Insurance Trust, the annual gift tax exclusion is used to minimize gift taxes. Since 1932, individuals have been able to gift an amount, each year – gift tax free – for the benefit of someone other than their spouse. In 1997, the amount was legislated at $10,000 and set to inflate in $1,000 increments. As the increments are tied to the CPI, it is impossible to predict when the annual gift amount will be increased. Therefore, the calculations in this website have assumed a level annual gift exclusion of $13,000 per person (i.e., $13,000 for single, divorced and widowed examples and $26,000 for married).

4. Simultaneous Death in Married Examples: To simplify the scenarios in this website, when the example displays a married individual, it is assumed that both die on the same day. Therefore, there is no growth of assets between deaths. Furthermore, it is assumed that the unnamed spouse is the first to die and that the unnamed spouse takes full advantage of the estate tax exemption available in the projected year of death, then utilizes the marital deduction to leave the balance of their assets to the named spouse (i.e., Ben or Karen).

5. No Claw-back: For gifts made in any year when the exemption amount is legislated to be less during a projected year of death than it was in the gift year (e.g., gift in 2012 and death in 2013), this calculator assumes that there will be no “claw-back.” The term “claw-back” refers to situations where a tax benefit that is utilized in one year, and legislated to decrease in a future year, will not be reversed by the IRS. For example, in 2011, the exemption amount was $5,000,000 and the amount legislated for 2013 was $1,000,000. The assumption is that the IRS would not penalize a person’s gift over $1,000,000 in 2011, if they died in 2013.

ABOUT LIFETIME GIFTING

The two primary determinants in the potential success of a lifetime gifting program are as follows:

1. Past, Present and Future Estate and Gift Tax Environment: The future legislative environment surrounding estate and gift taxation is unpredictable. Irreversible decisions made in the past or current tax environment may be rendered ineffectual by future legislation. For example, if a person of wealth gifted the maximum exemption amount in 1995 ($600,000), for the sole purpose of reducing their family’s estate tax bill at death, and then that person died in 2010, when estate taxes were completely repealed, then the lifetime gifting strategy achieved nothing. What is the future of estate taxes? No one knows. What is known is that, as of this writing, there has been an estate tax for every year since it was enacted (in 1916), except one: 2010.

2. Growth of Gifted Assets: Essentially, gifted assets do not escape taxation. If we assume, for a moment, that the exemption amount (the amount you can pass to a non-spouse without taxation) were to remain the same year over year, then utilizing the exemption during life simply means that it would be unavailable to utilize at death. So why gift? To remove the growth on assets from taxation. If a $600,000 asset were gifted ten years ago and this year the individual died, that gift would be brought back into the estate tax calculation at its original value – not at today’s value. If the asset had doubled in value in those ten years, then an extra $600,000 will escape taxation.

But, what if the asset did not grow, but decreased in value by half? Then, the estate taxes would be paid at a $600,000 level, when the asset is only worth $300,000 – meaning that the gifting strategy actually increased the estate tax bill. Had the asset not been gifted, then it would have been run through the estate tax process at the $300,000 amount. From this example, one can see that, if the goal of a lifetime gifting strategy is to reduce estate taxes, then the assets to be gifted should be those with strong growth potential.

ABOUT AMERICAN GENERAL LIFE COMPANIES:

American General Life Companies, www.americangeneral.com, is the marketing name for a group of affiliated domestic life insurers, including American General Life Insurance Company (AGL) and The United States Life Insurance Company in the City of New York (USL).

Please note that AGL and USL are solely the providers of the insurance products. The companies, its employees, agents, representatives, and its affiliates do not provide tax, legal, or financial advice. No representation or warranty, express or implied, is made by AGL, USL and its affiliates as to the completeness of the information in this presentation.

It is strongly suggested any individual should consult their personal tax, legal, or financial experts or advisors with any questions prior to gifting assets or to determine the effect of estate taxes on their factual situation.

©2012. All rights reserved.
AGLC106067