How the End of the Bush Era Tax Cuts Affects the Funding of Offshore Trusts

During George W. Bush's presidency, several important tax cuts and rules were made regarding estate taxes. In particular, it was established that an individual could give away slightly more than $5 million without being assessed estate or gift taxes.
After Barack Obama took office, Congress extended this exemption through 2013 and increased it to $5.25 million. These cuts are of particular importance to individuals who reduce their taxes as part of estate planning because the exemption may not be available beginning in 2014.

The Tax Exemption

The tax exemption allows each person to give away $5.25 million through an irrevocable gift or estate transfer. If Obama's proposed budget is passed, the tax on the estate tax will revert to the 2009 rate of 45 percent, and the exemption reverts to $1 million.

Because the future of the exemption and the tax rate is uncertain, some investors may wish to transfer funds now in order to avoid taxes. Investors may use domestic trusts or offshore trusts to handle these gifts, especially if they have minor children or want protection from creditors.

Advantage of Making Gifts Now

If the provision regarding the $5.25 million expires, investors will not be able to take advantage of the higher exemption limit. Therefore, investors can establish foreign trusts today and place gifts in them at a higher level of exemption, compared with a potential lower exemption amount in the future.

There is no retroactive estate tax, so if a person gifts $5.25 million now while the exemption limit is higher and the government decreases the exemption to $1 million next year, the investor will not owe estate tax for the difference.
The government can also not include the growth into the investor's estate. Individuals who are liquid enough, are of the right age and have the right structure through a domestic trust or foreign trust can take advantage of the higher exemption amount. Individuals who do not have enough funds to give a $5.25-million gift can still make smaller gifts through the use of an offshore account or domestic account.

To learn more about how you can prepare your assets in an offshore trust before the provision comes to an end, contact Nagel & Associates.

IRS Circular 230 Notice: The Statements contained herein are not intended to and do not constitute an opinion as to any tax or other matter. They are not intended or written to be used, and may not be relied upon, by you or any other person for the purpose of avoiding penalties that may be imposed under any U.S. Federal tax laws or otherwise.