• Year-End Gifting
  • September 22, 2012 | Author: Margaret S. Ng
  • Law Firm: Garrett DeFrenza Stiepel Ryder LLP - Costa Mesa Office
  • With less than three quarters of the year remaining, it may seem premature to begin the countdown to 2013.  But in the estate planning world, it is not too soon to start considering your gifting and estate plan objectives for 2012.  As you may have heard, the current gift and estate tax exemption amount -- the most generous to taxpayers in the history of the estate tax -- is scheduled to decrease at the end of this year.  In this article, we remind you of the gifting opportunities available for the remainder of 2012. 

    Increased Lifetime Gift Tax Exemption

    The lifetime gift tax exemption has been increased to $5.12 million per person.  This means that an individual may give away cash and other assets with a total value of up to $5.12 million, less the total value of gifts previously made, in 2012.  This $5.12 million lifetime gift tax exemption is scheduled to revert back to approximately $1 million (subject to adjustments for inflation) on January 1, 2013 if Congress does not act to extend the increased exemption.  Further, the top estate tax rate is also scheduled to increase from 35% to 55% in 2013 without further legislation.  There is indication that even President Obama (if re-elected) supports a $3.5 million exemption per person but it is difficult to predict what legislation Congress will actually pass.

    There are many issues to consider before you gift under the increased gift tax exemption.  First, whether you desire to relinquish control of the cash or asset you would gift and your recipient’s situations are key considerations that should be weighed together with any tax advantage of gifting.  There are various ways to make gifts while maintaining some direction over how gifts are used such as gifting in trust.  Another consideration to keep in mind is that the aggregate value of the gifts made in your lifetime (with the exception of gifts made under the annual exclusion discussed below) will be counted towards your estate tax exemption (which is currently $5.12 million).  Depending on the political environment, it is possible that gifts made by a person during his or her lifetime, in excess of the exemption amount at the time of that person’s death, may be clawed back into that person’s estate and taxed.  However, many practitioners, do not believe gifts will be retroactively taxed at a person death, especially when considering constitutional issues.

    Gifts made in 2012 should be made while taking into account your larger estate planning objectives and any estate plan you have in place.  You should assess which assets should be gifted to optimize the gift, transfer and income tax implications.  When deciding on the asset there are a few important factors to consider, such as your business succession plans and the timing for such succession (for gifts of company stock or interest), the likelihood of appreciation of the assets, property tax values and capital gains tax bases.  The manner in which you gift should also be considered.  There are various means to effectuate your gifts to meet your tax and non-tax objectives, such as gifting in trust, purchasing life insurance policies and funding a trust for your beneficiaries to leverage your gifts, and forgiving outstanding loans owed by your recipients. 

    Annual Gift Tax Exclusions

    Keep in mind there is also an annual gift tax exclusion, which allows a person to give a certain amount each year to each recipient without being taxed.  For 2012, the annual exclusion amount is $13,000 per recipient.  The annual gift exclusion is separate from the lifetime gift and estate tax exemption (discussed above). 

    By utilizing annual gifts you can, over time, remove money or assets from your estate free of taxation, including taxes on future appreciation if the gifts are appreciating assets.  While annual gifts may not eliminate estate taxes on your estate in one year, making continual gifts on an annual basis may significantly reduce the overall tax burden on your estate.  Furthermore, the annual gift exclusion amount is unlimited for gifts made for qualifying education and medical payments of recipients.  Note that the gifts made for a recipient’s educational and medical expenses must be paid to qualifying institutions and are subject to certain restrictions. 

    If you have not started the process of considering your gift and estate objectives, now may be a good time to do so.  The gifting process involves deliberation, consultation with your advisers, analysis of the tax implications for both you and your recipients and, if you choose to proceed, the implementation of your gifts.  Before making any sizable gifts, consult with us or your legal and financial advisers regarding the tax considerations for your individual situation.


    IRS Circular 230: Any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on any taxpayer or promoting, marketing or recommending to another person any transaction or matter discussed in this article.