■ Standby-BDIT: With 2013 potentially bringing whopping estate tax increases, bolstered by President Obama’s proposals to zap lots of fun estate planning toys (GRATs, discounts, grantor trusts, dynastic planning), what can rich folk do to protect their kiddies future estate plans? Set up a beneficiary defective irrevocable trust (“BDIT”) today for each kid and gift $5,000 to it. Use the cheapest trustee you can find in Alaska, Delaware, Nevada or South Dakota. That will create for kid a trust, the Standby-BDIT, that will hopefully grandfather grantor trust status, GST/dynastic tax benefits, and more. Wow! But just like with the Sham Wow infomercials…There’s more! Read on…
■ The Gift that Keeps on Giving: While the average rich kid should get the folks to set up a BDIT described above, here’s an idea that could be waaaay better than a Standby-BDIT (Sorry Dick!)? Richie Rich can’t get his folks to make him a gift since they’ve likely used up their $5.12M exemptions on non-reciprocal dynasty trusts or DAPTs. So how can Richie Rich, the poor little rich boy, take advantage of his $5.12M exemption and grandfather all the great benefits of the Standby BDIT technique above? Try this one on for size. Richie Rich should get his dad Richard Rich Sr. to loan him say $6M so Richie could make a gift to a Richie DAPT. But that loan won’t be respected ‘cause Richie doesn’t have enough assets in his own right to support the repayment of the loan. The IRS would challenge the purported loan as a taxable gift. Ouch, even Richard Rich Sr. wouldn’t find that painful. Enter SuperInsuranceMan! Neato, Presto, Zap! Zowie. If Richie will buy a big permanent life insurance policy the loan can be structured as a split-dollar loan with the appropriate elections filed as required by the split-dollar Regs. Gee, now the IRS has to recognize the transfer as a loan ‘cause its own Regs say it has to. Richie can gift the $5.12M to his very own DAPT. Years from now the DAPT, as a grantor trust, could buy the insurance from Richie, if advisable. Now Richie has a fully funded $5.12M grantor, dynastic trust that hopefully will be grandfathered if the laws are all changed. This will be the keystone for all of Richie’s future planning. Oh, but what if Richie dies while the policy is held by his estate? Gee, everyone will still be way better off as a result of the large policy they he owned. If this idea doesn’t get your insurance agent smiling, check his pulse!
■ Rewrite Your Living Will: Hey wanna save the kids some estate tax dollars? Update your living will and health proxy to provide that if you have anything worse than a cold or hangnail, your heirs should pull the plug before New Years. Dying in 2012 with a $5.12 million exclusion and 35% rate, versus checking out in 2013 with only a $1 million exclusion and 55% rate, could mean big bucks to Junior. Horrific and unconscionable? Sure, but worse has and will happen for money. If you’d rather not become fish food to save Junior a few bucks, some of you had best change your health care agents to someone who won’t stand to inherit the tax savings.