This is the seventh article of a series designed to provide guidance for those individuals who are considering making a large gift in 2012 to take advantage of the $5.12 million federal gift tax exemption that will expire at the end of the year. For prior articles, see below.
Two prior articles discussed the Tennessee Gift Tax clawback issue. Last week, I met with a couple to establish a trust for their children. They plan to make a gift of $10.2 million to the trust later this summer. We discussed the Tennessee clawback issue and the potential solutions. The wife is seven years younger than the husband and does not have any major health issues. She will be making the entire gift. Even though this decreases the chances of the gift tax clawback from applying, there is still a chance that the wife could get run over by the proverbial beer truck.
We discussed the possibility of including a contingent marital trust that would make the husband a beneficiary of the trust if the wife dies within three years after making the gift. Since a primary purpose of the trust is to provide an asset base and income for their children, they did not like the option of the contingent marital trust.
We came up with a different solution. The trust will purchase a term life insurance policy on the wife’s life that can be dropped after three years. When the wife makes a gift to the trust, she will require the trustee to assume liability for any Tennessee inheritance taxes that are eventually imposed on the gift. If the wife dies within three years, the trust will collect life insurance and will be able to pay the additional Tennessee inheritance taxes.