Tick Tock. Tick Tock.
Summer is almost over and the 2010 Tax Act is scheduled to sunset at the end of this year. The result is the end of the extremely favorable estate, gift and generation skipping (GST) lifetime tax exemption (currently at $5,120,000 per individual or $10,240,000 per couple). As it currently stands, the rates will drop down to $1,000,000 or $2,000,0000, respectively, and estate, gift and GST tax rates will bump from 35% to 55%, on January 1, 2013. There is speculation on the Hill on what may or may not happen before the new year, but with the election around the corner the chances of seeing any news on this front before December is slim to none. What does this mean for Americans? You will have a very small window to react pending what Congress decides to do (or not to do) before January 1.
What does this mean for me or my clients?
Individuals should strongly consider gifting strategies in 2012 to capitalize on these rates and exemption amounts. Many planners are encouraging gifting mechanisms, like Irrevocable Life Insurance Trusts, to capitalize on the current gift and estate tax laws. This strategy allows the giver’s portion transferred to be exempt from gift and future estate taxes (plus any subsequent appreciation on such transfers), so long as it does not exceed the 2012 thresholds.
Jack & Jill recently retired and have an estate worth $7,000,000. If this couple does no gifting in 2012 and new laws are not enacted before both pass away in 2013, their estate would have to pay $2,750,000 (($7M – $2M)*55%) in Federal Estate Tax.
Under the same fact pattern, if Jack & Jill had made certain gifts totaling $5M in 2012 to family, friends, charities and/or trusts, their Federal Estate Tax exposure would’ve been ZERO (($2M – $2M)*55%). As this illustration shows, Jack & Jill saved almost $3M in Federal Estate Tax by utilizing the proper gifting strategy in 2012.
The proper gifting strategy depends on your goals, age and many other considerations and should involve your financial planner, CPA and estate planning attorney. For more information on how to utilize the existing gifting laws/rates, feel free to contact one of our attorneys at AlerStallings to discuss gifting strategies before the time runs out this year.