INTRODUCTION

What if you could tuck away up to 5 million dollars for yourself and your loved ones and be assured that the funds would be safe for generations to come? Would you like to have a financial bunker to shield you from unforeseen problems? A window of opportunity opened on January 1, 2011. It won't be open forever - maybe a year or two. Maybe less.

Recent changes in the tax law, coupled with favorable developments in select state laws, have made it possible to set up a long-term family trust fund that:

• Is available for you and your loved ones for generations to come
• Incurs no gift tax cost
• Is free of estate and generation skipping transfer tax forever
• Can't be reached by future creditors
• Doesn't require use of an off-shore trustee

By using select state laws, you can even be a beneficiary of the trust and the trust assets will be protected from creditors. Historically, if you set up a trust and made yourself a beneficiary, your creditors could ignore the trust and reach the assets to satisfy claims against you. Legislation in select states now prevents creditors from reaching trust assets to satisfy claims, even against the trust beneficiary who established the trust. This creates an exceptional opportunity to protect assets while enjoying economic benefits and avoiding transfer taxes. We call it the Family Firewall Trust™.

BACKGROUND

Until January 1, 2011, the lifetime gift tax exemption was limited to $1 million, even though the estate and generation skipping exemptions were much greater or limitless. This limited the opportunity to make lifetime gifts to relatively small amounts. The new tax law includes a $5 million gift tax and estate tax exclusion coupled with a $5 million generation-skipping transfer tax exemption. The alignment of these exemptions creates a new opportunity to transfer significant wealth into a special vehicle to manage and protect that wealth for generations, and to do so at no transfer tax cost. An individual can transfer up to $5 million and a married couple can transfer up to $10 million, all without incurring gift tax on the transfer. Better yet, if the assets are transferred to a long-term "dynasty" type trust and GST exemption is allocated to the transfer, the assets can continue in trust for your current benefit and for future generations without ever incurring a transfer tax again.

HOW IT WORKS

Gift Tax

The federal lifetime gift tax exemption has been raised to $5 million. This means that each individual can transfer up to $5 million in cash or other property during lifetime without incurring any gift tax. In 2010, a $5 million gift would have incurred federal gift tax of $1.4 million. The same gift today incurs $0 gift tax. So there is no gift tax on the initial transfer to the Family Firewall Trust(TM). This new ability to make a gift of up to $5 million is what allows the Family Firewall Trust (TM) to have such a big impact. But the $5 million exemption is scheduled to drop back to $1 million in 2013, so the time to take advantage of the new law is now.

Note: The gift and estate tax exemptions are now fully "unified". Lifetime use of the gift tax exemption reduces one's estate tax exemption, dollar-for-dollar. Even though these are unified, there is a big advantage to lifetime giving: future appreciation in the assets will occur outside of the donor's taxable estate. Once the gift to the Family Firewall Trust(TM) is made, all future appreciation on the assets also escapes transfer taxes. But in 2013, the opportunity to make these big tax-free gifts will go away, so it's important to act now.

Estate Tax

Lifetime use of the $5 million gift tax exemption will also use up $5 million of the donor's remaining estate tax exemption. That's OK -- it is usually better to make gifts during lifetime than at death because of the leverage that is gained from future appreciation in the assets. A gift to the Family Firewall Trust(TM) removes assets from the donor's taxable estate, even though the grantor is a permissible beneficiary of the trust.

Generation-Skipping Transfer Tax

The generation-skipping transfer tax ("GST") exemption has been increased to $5 million. The GST is a confiscatory and complicated tax that applies to gifts to certain younger generation beneficiaries such as grandchildren. The GST should be completely avoided if at all possible. Wise use of the GST exemption can shelter assets from the GST for generations, whereas failure to properly use the GST exemption can be extremely costly. By allocating the full $5 million GST exemption to the Family Firewall Trust(TM) distributions to the beneficiaries will never incur the GST tax.

Creditor Protection

Specific states have enacted legislation that allows individuals to establish a trust, naming himself or herself as a permissible beneficiary (a so-called "self-settled trust"). In most states, a self-settled trust would be vulnerable to the grantor's creditors. In other words, a judgment creditor could reach the assets in the trust as though the assets were still owned by the debtor-grantor. But in certain states, as long as the grantor is still solvent at the moment after the gift, creditors of the grantor or any other beneficiary will be barred by state law from reaching the trust assets.

Choosing a Trust Jurisdiction

Alaska is the prime jurisdiction for the self-settled trust. The Alaska legislature has been crafting special laws since 1997 to attract trust investment and offer special protections for donors. Nevada is another attractive jurisdiction and in certain cases may be an even better choice than Alaska. The attorneys at DSH can help you wade through the advantages and disadvantages of the various eligible trust jurisdictions.

NOW IS THE TIME TO ACT

At DSH, we believe there is a unique but fleeting opportunity to establish a meaningful financial backstop without incurring any transfer tax cost.

The estate planning lawyers at DSH are ready to help. Contact Connie Berens at 248-649-6000 to set an appointment with Joe Thomas or Mark Mueller.