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Opportunity for affluent to transfer wealth may be ending

Could this be the golden age of estate planning?

Some financial advisers believe it is -- at least until the end of the year.

That's when key income tax breaks for transferring wealth are scheduled to expire.

"We're in a unique period in the history of estate taxes and transfer taxes in general, and it may be short-lived," said R. Hugh Magill, chief fiduciary officer at wealth-management firm Northern Trust.

Here's the situation:

The gift and estate taxes are separate taxes, but their rates and exemption levels are the same.

Under current law, each person can give away or leave to their heirs up to $5.12 million with no federal gift or estate tax consequence. Gifts or inheritances greater than that amount are taxed at a top rate of 35 percent.

Unless Congress acts, the federal gift and estate tax exclusion will revert back to $1 million on Jan. 1, and the marginal tax rate will rise to 55 percent.

Financial advisers say this is a great window of opportunity for the affluent to transfer wealth.

"The 2010 Tax Reform Act ushered in this unprecedented era of dramatically higher exemptions," Magill said.

In fact, the current tax exemptions are the largest in history, said Debbie Cox, managing director and wealth adviser at JPMorgan Private Bank in Dallas.

What's more, the 35 percent top tax rate is "the lowest rate that we've had on wealth transfers since 1931," Magill said.

"Some of the greatest American dynasties were created in the beginning of the 20th century, when transfer tax rates were at all-time lows," Cox said. "The current window of opportunity created by the new legislation may inspire similar transfers of wealth."

So how can you take advantage of this?

"For the very wealthy, it's pretty much a no-brainer that husband and wife would set up a trust for children and grandchildren and fund it with their exemption amount," Cox said. "That would be exempt not only from the gift and estate taxes, but also from generation-skipping taxes."

Here are some other approaches.

*Gifts: "You may want to consider making an immediate gift in order to use all or part of the $5.12 million individual or $10.24 (million) per couple federal lifetime gift tax exemption," according to Fidelity Investments. "This gift can be made outright to individuals or into an irrevocable trust."

You must make the gift by Dec. 31.

"Even if you don't have $5 million, if your plan is to pass your family business or family farm to your children, now might be the best time to start," said Thomas Murphy, certified financial planner at Murphy & Sylvest LLC in Dallas. "There are several ways to pass portions of the business or farm to children outright or in trust."

*Forgiving loans: Magill said there may be "some unique issues in a family where some very targeted gifting could help solve some problems."

Say you have one child who's financially independent and another who's had a hard time getting going, so you have lent him money.

Now is a good time to consider forgiving the debt of the financially dependent child, Magill said.

"Forgiving the loan would turn the loan into a gift," he said. "It's a gift that you have to report, but of course the exemption is available to shelter that gift up to $5.12 million."

Dynasty trusts: A dynasty trust is designed to hold assets in trust without direct ownership being transferred to any beneficiary.

The trust is "intended to run for several generations in a family," Magill said.

In other words, successive generations may receive distributions from trust assets allowing for growth.

For tax purposes, the trust's assets are valued at the amount they were worth when the trust was created as long as they stay in the trust. Any appreciation generally is exempt from estate taxes.

*Special-needs trusts: This is a critical tool for families with a special-needs child.

The purpose of a special-needs trust is to manage the family's financial resources while maintaining the child's eligibility for public assistance benefits.

"It has to be drafted by an attorney who has experience in this area so that the trust does not place at risk either the benefits themselves or place at risk its own assets by a claim from the government," Magill said.

For estate-planning purposes, the establishment of a special-needs trust removes the funds from your estate.

*Pre-fund inheritance: The traditional estate planning of a generation ago had been based on the expectation that "Dad would die first, survived by his first and only spouse, who would then have the benefits of the assets during her succeeding life, and the children's inheritance would be deferred until the second death," Magill said.

That doesn't always work in a blended family, with children from a previous marriage of one or both spouses, he said.

"Deferring the children's inheritance until the second spouse's death -- that's a challenging phenomenon," Magill said. "Maybe you should pre-fund some or all of the inheritance so that you separate survivorship from inheritance."

But before you decide to transfer any wealth, make sure you don't shortchange yourself. Will you need these funds at some point?

"I've seen circumstances where there's been very aggressive gift-planning where parents and, in some cases, grandparents, have had to go back to descendants and get loans and get support, and that is not a good thing," Magill said.