In the spirit of consolidating your financial house, since you’re likely wrapping up your 2011 taxes, now is a great time to go one step further and review your gift and estate tax options as well.
Remember when 2010 was designated as "the year to die" from an estate planning perspective? Well, for now, it’s looking like 2012 is the year to gift!
Until the end of 2012, an individual may gift up to $5,120,000 to individuals without paying any gift tax, and this amount is in addition to the annual exclusion gifts of $13,000 per person per year. The $5,120,000 exclusion also applies to generation-skipping transfers for the balance of 2012. At the end of 2012, unless the law changes, the $13,000 exclusion will continue, but any amount over that will then be subject to a $1,000,000 limitation on lifetime gifts. Any amount over that sum will cause a tax to be due at the rate of 55%.
In the proposal submitted by President Obama, the $5,120,000 exemption would reduce to $3,500,000 in 2013 and for years beyond. However, the generation-skipping exemption will remain at $1,390,000.
While these numbers seem to be relatively high, if you have greater than these sums upon death, then there will be an estate tax due that would be in the vicinity of 45% on the excess of the exemption amount. Therefore, 2012 is a very important year to make your gifts, since the exemption is significantly higher than it will likely be in the future. Naturally, for a husband and wife, the amounts stated above double in most cases.
Another important concept that is currently in effect and will hopefully continue is that of allowing the surviving spouse to utilize the exemption that was not used when the first spouse died. This is what is known as portability for estate tax purposes. There are some limitations on the use of the portability exclusion, such as surviving spouse may only use the exemption that is left on the last surviving spouse he or she is married to.
In addition, a federal estate tax return is required to be filed at the current time on all estates in order to claim the credit, whether or not the estate of the first to die is taxable. This is often a benefit for a spouse who does not wish to set up a trust for the surviving spouse, but rather, wishes to leave all funds to the surviving spouse. The benefit is that the estate planning process is somewhat simpler and less expensive, but it may be more costly in the future. This is due to the fact that the congress and president may change the laws and reduce exemptions or possibly eliminate the benefit of the portability exclusion in future years.
Another down side is the fact that the assets may in fact increase in value, thus causing the surviving spouse to have more assets in that estate, only to cause an estate tax to be due if the exclusions are exceeded.
Another down side is that the surviving spouse may remarry, thus allowing the new surviving spouse the opportunity to claim a share of the assets in the event that a prenuptial agreement is not prepared. Furthermore, the assets of the surviving spouse may be available to creditors, taxing authorities, and possibly further spouses in the future event of marital discord.
Nevertheless, the laws provide that significant gifts may be made through the end of 2012. These gifts do not include amounts transferred to charities, as there are no limits on the amounts that may be gifted to charities, but rather, there may be a limitation on the deductibility of the gift.
2012 being an election year makes planning difficult as there are usually changes made at either the very end of the year or the beginning of the following year that may have an adverse impact on the amount a person may gift during lifetime and upon death. Little is for certain in these situations, and one must also be mindful of the state gift and estate tax laws when proceeding to complete the lifetime/estate planning considerations.
As always, it’s best to consult your legal and financial advisors if you want to gift significant assets this year.
Hyman G. Darling, Esq.