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Taxpayers can transfer a significant amount of wealth before the end of the year and pay no gift tax.

Window Is Closing for Estate and Gift Tax Planning for 2012

  • Jamey Rappis
  • 9/6/2012

Under the current estate tax law, a window of opportunity is ready to snap shut on December 31, 2012. For estates of individuals who pass away in 2012, the federal estate tax exclusion is $5.12 million and the estate tax rate on the taxable value of estates and gifts is a flat 35 percent. But estate planners are excited because the federal gift tax exclusion is also $5.12 million for 2012. This means taxpayers can transfer a significant amount of wealth before the end of the year and pay no gift tax. (Taxpayers should check with their local tax advisors about state inheritance or gift tax laws that may apply.)

Death tax or transfer tax?

When a person passes away, the federal estate and gift tax system tallies all of the assets and allows deductions for expenses and items that pass to a charity or a surviving spouse. The law sets an upper limit on the amount that can be “transferred” tax free — the estate tax exclusion. So the estate tax is not a “death tax;” it is a “transfer tax.” If the transfer is less than the exclusion amount remaining at death, no tax is due.

Lifetime gifts are gifts above the amount of the annual exclusion (currently $13,000 per donee). Lifetime gifts are “taxable gifts” and are tallied during a person’s life (on gift tax returns) and reduce the estate tax exclusion available upon the person’s death.

Window of opportunity

For 2011, the gift and estate tax exclusion was raised to $5 million — an all-time high. For 2012, this amount has been adjusted for inflation and is presently $5.12 million. The estate and gift tax maximum rate is currently 35 percent. For perspective, the last time the estate and gift tax rate was that low was 1931!

Under the present law, these generous rates and exclusions are set to change dramatically. The exclusion for gift tax and estate tax will revert back to $1 million and the top rate will increase to 55 percent on January 1, 2013.

Time to act is now (or not)

Individuals (and married couples) with large estates, who have not used any or all of their current $5.12 million exclusion, need to examine their options as soon as possible. There are several approaches through which they could “lock in” the use of the exclusion through a lifetime gifting mechanism. Similarly, a variety of trusts could use some of the exclusion. But you need to use the correct tool for each unique situation.

It takes a great deal of time — sometimes months — to correctly implement sophisticated estate planning techniques, so it is not wise to wait much longer to revisit an estate plan and consider how best to use the increased exclusions. It is not prudent to wait until after the presidential election either. After considering your options, the right answer for your situation might be to do nothing. Many estate planning techniques involve gifts where an individual relinquishes control over the assets, which also means he or she loses the ability to receive income from those assets. If someone cannot live the way they would like without the income, the asset should not be given away. Now is the time for high net worth individuals and married couples to examine their financial situations, knowing that today’s high estate and gift tax exclusion may get reduced significantly at the end of the year. Adequate time ensures that everyone carefully considers the next step, whether it means making significant transfers before the end of the year or doing nothing at all.