Protect Your Assets Before Year's End

As things stand now, come Jan. 1, 2013, gift, estate and generation-skipping transfer tax exemptions, which currently stand at $5.12 million, will revert back to $1 million. That’s a huge drop off, and one that physicians might want to avoid by acting now to protect their assets.

“There’s a lot of concern that Congress is not going to take action before the end of the year,” says Bob Tucker, MD, an accredited investment fiduciary and vice president at Plancorp, who practiced orthopedics for more than 25 years. “And if Congress does nothing, then the regulations do revert as of Jan. 1.”

As such, it’s time to plan ahead.

Know your comfort level

Tucker explains that there are many steps that can be taken by physicians who have accumulated significant net worth and are either nearing retirement or may already be in retirement. The first step is determining whether or not they have the finances and the comfort level for certain strategies, some of which permanently transfer money out of their estate and out of their control.

“There are a number of different techniques,” Tucker says. “In Missouri, for example, for a married couple, there is a provision in the trust regulations called a Spousal Access Trust. And essentially what one spouse can do is make a gift to a trust of which he is no longer the trustee; he’s no longer in control of those assets. So, essentially, a spouse transfers assets into the Spousal Access Trust, which grants his wife access to the income and to dividends and to principle, if necessary, under certain conditions throughout her lifetime. And then upon her death, those funds are then transferred to a beneficiary, which is usually the children.”

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Quite often, Tucker adds, even at the wife’s death, the funds remain in a trust and the children are he beneficiaries of that trust. And then their children are the beneficiaries and so on and so on. By utilizing both the gift tax and the generation-skipping tax exemption, a pool of assets can be permanently taken not just out of estate of the current generation, but out of the estate of future generations.

“So, not only are you taking out the initial gift in value, you’re taking out any appreciation that is generated by those assets,” Tucker explains. “It’s a very, very powerful technique.”

The middle-aged physician

For younger physicians, or for those who are not quite certain that they want to give up complete control of their assets, Tucker suggests a Grantor Retained Annuity Trust (GRAT). The idea behind a GRAT, he explains, is that physicians would not be giving away today’s value of the assets, but rather the future appreciation of those assets.

As an example, Tucker suggests that a physician could put $2 million of stock into a five-year GRAT, and every year the physician, as the grantor, could transfer 20% of the original stock value, plus the interest rate, which is currently about one-and-a-half percent, back to himself.

“That’s the annuity portion,” Tucker says. “And those terms are all fixed the day the GRAT is activated.”

At the end of the GRAT’s five-year term, the grantor will have received back all of his shares of stock, as well as his one-and-a-half percent interest rate on the value of those shares when he put them in the GRAT. What remains in the GRAT is the appreciation. So, if the stock was originally worth $2 million and appreciated to $3 million, the remaining $1 million dollars in the trust is for the benefit of the beneficiary.

“In essence, what the grantor has accomplished is he or she has moved $1 million out of the estate; and that $1 million is no longer subject to estate tax,” Tucker explains.

Stay flexible

Tucker says that whether Congress takes action before or after Jan. 1, or no action whatsoever, is anybody’s guess. As such, he stresses that, regardless of the level of worth a physician may have attained, it’s especially important to maintain flexibility.

“There’s a lot of buzz out there that eventually we will get to a point where the estate tax exemption will be somewhere in the $3- to $5-million-dollar range per person,” Tucker says. “It may not have the portability that exists today, and I think that most people feel that the generation-skipping transfer tax exemption and the gift tax exemption may not go back up; that it may stay at $1 million. So, we would be in a situation where, at your death, you could give away, for example, $3 million free of estate tax, but during your lifetime you could only give away $1 million free of estate tax.”