Taking a “Do Over” for 2012 Asset Transfers

The last few months of 2012 were filled with mass speculation about how many federal tax issues would ultimately be decided. One part of the high-profile “fiscal cliff” proposal and competing options was the estate tax. As oft-discussed, the final tax details could have fallen anywhere between a $1 million or $5 million exemption level, with rates anywhere from 35% to 55%. Fearing that no agreement would be made and the country would “go over the cliff,” many local residents conducted last minute wealth transfers to take advantage of what was assumed to be relatively favorable rates in 2012 that might disappear in 2013.

As we now know, the country did not go over the cliff. As for the estate tax, the compromise did not see nearly as sharp a rise as expected, with a $5.25 million exemption level and 40% rate (up somewhat from the 35% in 2012).

Considering that the concerns which led to many transfers in late 2012 were false alarms, is there anything that can be done to reverse the transfers? That was the subject of a recent Forbes article discussing the “Buyer’s Remorse” of many who pulled the trigger on different financial plans as a result of tax uncertainties.

The story reminds that wealth transfers to others–usually children or grandchildren–can be reversed only in certain circumstances, depending on how the arrangements were crafted. Fortunately, in most cases the transfers were made via trusts with “controls” attached. Those control often allow changes to be made which can help when seeking to effectively take the gift back.

Alternatively, the story explains how having a spouse can have the same effect. That is because in many cases the transfers gave large gifts to children in trust. Those transfers usually allow one’s spouse to use the funds (both income and principal) in any way that they chose. In that way, a couple may still have use of funds as if a gift wasn’t made.

The only way to know your options for sure are to work with your financial advisor and estate planning attorney to get tailored advice. Each financial transaction is different, and there is significant flexibility in how different trusts are set-up. The options for a “do over” hinge on those details. Even if you did not conduct end-of-year transactions in 2012 ,this situation is a helpful reminder of the need to think clearly in the future about whether or not you want certain planning actions to be revocable or irrevocable. There are different benefits to each, but it is critical to understand what steps are permanent and what steps are not when working through long-term financial planning and asset transfers.