Monday, January 30, 2012

Huge Tax Savings Available for Short Time Only

There exists right now a brief window of opportunity regarding family gifting. The Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2011 (2010 Tax Act) increased the lifetime gift tax exemption to $5 million in the year 2011, with an inflationary adjustment, to $5.12 million in 2012.  The 2010 Tax Act will no longer be in effect after Dec. 31, 2012, and according to the current law, the lifetime gift tax exemption is scheduled to revert to $1 million on Jan. 1, 2013. Until then spouses who have not previously made substantial gifts have the ability to transfer up to $10.24 million to friends and family or to trusts for them, if the gift is made before Jan. 1, 2013, with maximum rate schedules at 35 percent.

Through the remainder of this year, a number of opportunities for wealth planning are available. It is impossible to know what Congress will do, if anything, to prevent the scheduled exemption reduction to $1 million in 2013.  As a result, the amount of the gift tax exemption after Dec. 31, 2012 remains unclear. Thus, it may be prudent to consider certain wealth planning vehicles to utilize the benefits of the current exemption of $5.12 million effectively while in effect, even if your total assets do not meet the $5.12 million and $10.24 million thresholds.

Some of the benefits and opportunities of a gifting program utilizing all or a part of the lifetime exemption are as follows:

1. Reduction in Estate Tax: If the exemption is reduced in future years, a current lifetime gift can substantially reduce the estate tax burden to a family on the death of the donor. In many cases, a current gift of $5 million can reduce the estate tax burden by 40 percent of the gifted amount, or $2 million, thereby increasing by that amount assets ultimately available to the family, all assuming the exemption is reduced to $1 million as scheduled. Gifts can also reduce the state estate tax burden that exists in many states.

2. Removal of Future Appreciation From Tax: A current gift removes any appreciation on the gifted asset from the estate. Thus, if $5 million is given today of an asset likely to appreciate (say real estate or traded stock interest) and the gifted asset increases to $10 million, the $5 million of appreciation is not includible in the donor’s taxable estate.

3. Retention of Control and Income From Gifted Assets: Some donors are concerned over the loss of control and loss of the income of gifted assets. It is possible to design a gift-giving program between spouses so both spouses continue to retain significant control over the gifted assets and simultaneously retain the economic benefits of the gifted assets. For instance, spouses may establish trusts for each other for their joint lives, and thereafter for family members, utilizing their available gift tax exemptions, ultimately permitting up to $10.24 million plus appreciation to pass to family members without estate tax consequences. The design of such trusts must carefully conform with case law and IRS rulings to achieve the intended result.

4. Retention of Control and Annuity Stream for Designated Period: Gifts can also be made to Grantor Retained Annuity Trusts (GRATs) in which the grantor retains control over the gifted asset and retains an annuity stream for a designated period of time, which may be many years or as short as two years. At the end of the designated period, the asset may pass to family members without gift or estate tax consequences, depending upon the duration of the trust and the amount of the annuity stream passing tothe grantor. To be successful, the grantor must survive the trust term.

5. Protection From Creditors and Spousal Claims: Gifts can be directed to pass to trusts for family members in a manner that protects the assets from the potential creditors of the donees and from matrimonial claims of spouses of donees.

Wednesday, January 11, 2012

Can the 2012 Jordanian Peace Talks Succeed Where Others Have Failed?

This article by David Makovsky director of the Project on the Middle East Peace Process at The Washington Institute finally gave clarity to the reasoning and positions behind the current negotiations occuring between political attaches of the Israeli government and Palestinian factions.

After 16 months of no negotiations, Israeli and Palestinian officials met in Amman last week and again this week. Yet, the question remains whether these talks represent a new opening or if they are merely a tactical instrument for each side to perpetuate recriminations?

If it is only about tactics, these talks will enable the Palestinians to rebut the Israeli claim regarding the Quartet's 90-day clock for both sides to present a map on borders and security because there are no direct meetings between Israel and the Palestinians. On the other hand, should the Palestinians walk away from the table, this will enable the Israelis to repeat what they have always said, namely that the Palestinians' refusal to stay at the negotiating table is the source of the impasse.

The idea of talks having only tactical value or something more meaningful depends on a deeper question. At the core, there are internal policy debates within both Israeli and Palestinian policy circles on the value of making any concessions to each other when each side is absolutely certain that no territorial breakthrough will occur during 2012. These quiet domestic debates occur within Palestinian and Israeli policy circles, and not just between them.

Whatever their differences, all sides have agreed upon two points: there will be no territorial breakthrough during an American election year, and the debates are for policymakers since the publics remain skeptical of the other side's sincerity for peace.

The debates have therefore shifted toward discussing measures that can be taken in the absence of a territorial breakthrough. On the Palestinian side, Prime Minister Salam Fayyad has publicly championed the idea that the best means of building a Palestinian state is to continue institution-building efforts on the ground in the West Bank that show steady progress towards this goal. Such measures range from increased Palestinian economic access in the West Bank, increasing Palestinian police stations outside of Palestinian urban areas to eliminating IDF incursions in Area A, which Hamas has continuously cited as proof the occupation continues despite Palestinian security cooperation with Israel.

The other side of the Palestinian policy debate, associated with Abbas's foreign policy negotiating team, argues the best way to insulate the Palestinian Authority from the wrath of the Arab Awakening is through continued defiance of Israel. The school of thought believes it may be able to persuade PA President Mahmoud Abbas that his domestic popularity reached an all-time high following his bid for UN statehood in September, and this path of resistance will help to obscure his close association with the unpopular Hosni Mubarak. Moreover, this school will probably seek to persuade Abbas that diplomatic defiance of Israel will also help Fatah to compete with Hamas after it becomes clear that Fatah lacks a strong candidate for the May elections, especially given the political boost that Hamas may get from the current Islamist electoral wave in the Arab world.

Furthermore, this school is seen as viewing Palestinian defiance as virtually cost-free internationally. The popular unaccommodating image of Prime Minister Binyamin Netanyahu makes him an easy target, and both the Europeans and Arabs often assume that he is therefore the cause of any impasse.

On the Israeli side, the policy debate in 2012 will center on whether there is any value in yielding to Palestinian demands on non-territorial issues if a full peace deal is out of reach. Foreign Minister Avigdor Lieberman identifies strongly with this view.

A contrasting view comes from key parts of the Israeli defense establishment, which views the threat of a nuclear Iran as strong motivation for credible progress between Israel and the Palestinians. Three points make up this line of reasoning: first, that progress between Israel and the Palestinians could eventually lead to negotiations that would help to insulate the PA against any Arab Awakening revolts. Second, progress on the peace process front could allow Israel to focus more of its policymaking efforts on combating the Iran nuclear threat. Third, progress with the Palestinians could only benefit Israel as it seeks to reach out to various regional Arabs on the Iranian issue, and as it seeks to salvage its relationship with the Egyptian military -- seen by Israel as key to preserving the bilateral peace treaty.

One might add a fourth reason as well. Any progress by Netanyahu in 2012 would serve to counter the prevalent notion that only US pressure can spur Israeli steps towards peace. Paralysis in 2012 would only strengthen this argument, which is certainly not in Netanyahu's interest.

Some ministers and officials close to Netanyahu suggest Israel could accept progress on the ground if the Palestinians provide a quid pro quo. In other words, only if the Palestinians suspend their diplomatic efforts at the UN and other international agencies will they win any reciprocal Israeli action. It is this tradeoff that could pit the different sides of the Palestinian debate: those favoring progress on the ground versus those who want to wage a diplomatic defiant approach against Israel at the UN and elsewhere.

The current concern for the peace process is not what will or will not happen this week in Amman, but rather how policy debates in Jerusalem and Ramallah will shape a year of zero expectations. On the more optimistic note, when there are no expectations, they can be easily exceeded. On the less hopeful note, zero expectations, however, does not mean zero consequences. Given the current turmoil in the region, 2012 could be a very consequential year.


David Makovsky is the Ziegler distinguished fellow and director of the Project on the Middle East Peace Process at The Washington Institute.


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