The 2012 Lifetime Gifting Opportunity-A Planning Trick or Treat?

For estate planning professionals, one of the major changes presented by the 2010 Tax Act was the increase of the lifetime gift tax exemption from $1 million to $5 million (in 2012, it increased to $5.12 million).  This substantial increase to the amount that an individual could gift during their lifetime posed what many consider to be an “once-in-a-lifetime” opportunity to gift large portions of a person’s assets during their lifetime.  And with this increase in effect until December 31, 2012, a sense of urgency spread amongst advisors.

But just as quickly as this opportunity presented itself, tax professionals began to question if this was really the great planning tool it appeared to be.  Specifically, some began to worry that utilizing the full lifetime gift tax exemption may eventually lead to a claw back of a portion of the gift when the donor dies.

The premise of the claw back relates to interplay between lifetime gifting and the calculation of estate taxes at a person’s death.  When an estate ‘s executor calculates the taxable value of an estate, he or she must account for taxable gifts (gifts in excess of the annual gift tax exclusion) made by the decedent during their lifetime.  The more taxable gifts that are made, the smaller amount that can pass at your death free of estate tax.

The concern is because the current estate and gift tax exemptions are $5.12 million and both are set to reduce to $1 million, the IRS may impute a portion of a gift made before the end of 2012 into a future calculation of estate tax.  By way of example, if a claw back exists and an individual with a $6 million estate gifts the full $5.12 million before the end of 2012, then $4.12 million of that gift will be clawed back and used to calculate their estate taxes.

The main argument for the existence of a claw back is that under the current statutory interpretation, when calculating an estate tax, a tax preparer uses the constructive gift tax that would be due in the year that a gift is made.  Therefore, where that amount is low as it would be in years with a high exemption, the credit against the estate tax would be high and reduce the estate tax by less.  There has yet to be dispositive word from the IRS one-way or the other on this interpretation.

For those who don’t believe that the claw back is a problem, the primary argument against the application of a claw back is the intent of the 2010 Tax Act.  There was clearly no intention on the part of Congress to allow for large-scale gifts only to eventually recapture the lost tax revenue at a later date.   In addition, the nature of the gift and estate tax system is to tax gifts at the time they are made, not at death.  A claw back would be inconsistent with this.

There is also a political argument against the claw back.  While the gridlock in Washington makes any action before the end of 2012 unlikely, it is in neither party’s interest to apply a claw back.  Further, the 2010 Act was supported by both a Democrat President and Congress who would be more likely to support purported tax increases than their Republican counterparts.  It seems unlikely that they will support matters that would counter their previously passed laws.

Claw back or not, making a large gift before the exemptions expire at the end of 2012 still make sense for those with the means to make them.  For people with appreciable assets, shifting those assets to a younger generation now will remove the appreciation from their estates.  Further, for business owners looking to transfers their business in a tax efficient manner, this may be the best time to make those transfers while incurring less taxes than they will incur in future years.

Large scale gifting always comes with a degree of risk from a tax perspective.  The fear of a claw back may turn out to be real or imaginary, but in the end, it should not be the deciding factor in determining whether making a large gift is right for you.

For more information about lifetime gifting, please contact

The Coming “Taxmageddon” and How It May-Or May Not-Affect Your Estate Plan

This December, for the third time in four years, Americans will be faced with a significant change to the federal tax laws that may significantly affect their estate planning.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 will expire on December 31st of this year and barring Congressional Action, 2013 will begin with significant changes to the tax rates and exemptions that many have relied on in preparing their estate plans.

This potential change, which has been termed “Taxmageddon” by many in the media,  could be prevented if Congress and the President agree on a temporary or permanent change to the Tax Code.  However, with a national election coming in November and less than two months after that for any action to occur, there is a very real possibility that the below changes will go into effect.

Here is how these changes will affect your estate plan if there is no action by Congress and the President:

Estate and Generation Skipping Transfer Tax (GST Tax) Exemptions and Rates-The 2010 Tax Act increased the federal estate and GST tax exemption to the highest amount it has ever been and reduced the top tax rate to the lowest it has ever been.  After an adjustment at the end of 2011, the exemption stands at $5.12 million and the top tax rate is 35%.  Without a change to the law, starting in 2013, the exemption drops to $1 million and the top tax rate increases to 55%.

Gift Tax Lifetime Exemption and Rates-Currently, the lifetime gift tax exemption and top gift tax rate mirror the estate tax exemptions and rates.  However, prior to the end of 2011, the gift tax exemption had remained much lower than the increasing estate tax exemption.  And while opponent of the estate tax will likely work diligently to return the exemption to as close to the current exemption as possible, it is unclear that the gift tax exemption will have the same current support.  With a drop from $5.12 million to $1 million, the ability to make large lifetime gifts may soon disappear forever.

Portability of Spouse’s Estate Tax Exemption-One of the new ideas enacted by the 2010 Tax Act was the concept of portability.  Previously, a spouse could utilize their deceased spouse’s estate tax exemption only by using a credit-shelter trust created under their will.  The 2010 Tax Act allowed spouses to utilize any unused part of their spouse’s estate tax exemption without using a trust.  This concept will sunset along with the other provisions of the 2010 Act and it is unclear whether it will be continued when and if the Tax Code is amended.

Personal Income Tax Rates-All federal income tax rates are set to increase in 2013 with the largest increases falling on those making less than $9,000 a year and those making more than $380,000 a year.  It is uniformly agreed amongst both political parties than increasing the tax rates of most Americans would be harmful to our already fragile economy.  The difference that exists is about whether or not the tax rates for the top income earners should remain at the current 35% level or increase to 39.6%.   There is also some support for an additional tax on persons making over $1 million a year in income.

Personal Capital Gains Tax Rates-The current 15% tax rate for long-term capital gains will expire at the end of 2012 and increase to 20% beginning in 2013.  In addition, all dividends will be subject to ordinary income tax rates as the distinction between qualified and ordinary dividends will disappear.  For high earners, an additional 3.8% surcharge on capital gains income will be applied as part of the Affordable Care Act.

These changes can significantly alter not only a person’s financial planning, but their estate planning as well.  With less than six months until this change comes and the two political parties in no position to compromise, now is the time to speak with your financial advisors and your estate planning attorney to understand the consequences of this possible ‘doomsday’ scenario.

For more information on the 2013 tax changes, please contact