Estate Planners are always looking for new ways to assist their clients navigate and fully take advantage of the transfer tax system in ways that effectuate their wishes and intentions.  Much of our focus is on planning their estates and how property will pass when they die.  For some clients, estate planning also includes devising strategies for transferring assets during their lifetime.

From 2002 until the end of 2010, each individual could only transfer $1 million during their lifetime without incurring a gift tax.  This changed dramatically at the end of 2010 when the President and Congress enacted the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (“TRA 2010” for short).   Among the changes to the tax system was a significant increase in the lifetime gift tax exemption.  This provided a significant opportunity for individuals looking to make large-scale transfers of property during their lifetime.

As with most good things, this opportunity will not last forever and it is unclear whether the gift tax exemption will ever be this high again.  Over the next three days, I will explain what this opportunity could mean to you and your family, who this opportunity would be a good fit for and provide several planning techniques that can be used to maximize the benefits of this ‘once-in-a –lifetime’ tax planning event.

First, here is a brief overview of what this means to you and your family:

What is the 2012 Gift Tax Planning Opportunity? Under TRA 2010, the lifetime gift tax exemption was increased from $1 million to $5 million per individual ($10 million per married couple).  In 2012, the exemption was increased to $5.12 million.

Why is it a big deal?  The lifetime exemption has never been this high before and given the current fiscal health of the United States, it may never be this high again.  Before 2010, individuals wanting to make large-scale lifetime transfers above the $1 million exemption had to choose between making multiple smaller transfers utilizing the annual gift tax exclusion (currently $13,000 per individual) or paying a gift tax at a maximum tax rate between 35% and 50%.  After 2010, individuals could transfer five times as many assets at one time without incurring any gift tax.

When do the current exemption and tax rates expire?  The current gift tax exemption and maximum tax rate of 35% will expire on December 31, 2012.   It is possible that before the November election (very unlikely) or during the lame duck session after the election (possible), Congress and the President will enact new legislation that may maintain the current exemption and tax rate or possibly reduce both.  If the current exemption and maximum tax rate expire, the exemption will reduce to $1 million and the maximum tax rate will increase to 55%.

Who should take advantage of the current exemption and tax rates?  This opportunity could be useful to a wide variety of individuals and families.  For wealthy individuals looking to reduce the size of the taxable estates, making a gift this year will provide more certainty about their tax liability than exists with the current federal estate tax regime (the estate tax rates and exemptions will expire on December 31, 2012 as well).  In New York, there is no separate state gift tax, so a 2012 gift that reduces the New York state estate tax liability would be good utilization of the current federal exemption and rate.  I will go into more detail about this in tomorrow’s post.

Are there other reasons to make a 2012 gift besides gift tax savings? Yes.  In addition to the historically low gift tax rate and high exemption, interest rates are at historic lows.  For people looking to utilize planning techniques such as GRATs, transfers to defective grantor trusts and intra family loans, this low rate environment will allow individuals to pass the maximum amount of property to their beneficiaries while keeping any annuity, installment sale or loan payments low.

Depressed asset values also provide an additional benefit to the gift tax savings.  While the stock market has rebounded significantly, real estate and other non-publically traded assets have not.  Transferring these types of assets now will allow your beneficiaries to enjoy the appreciation of the property when values rebound.

Are there risks/disadvantages to making a 2012 gift?  Few planning opportunities are risk free.  Making 2012 gift comes with several including the possibility of running out of money if the donor does not retain sufficient assets; the transferred assets being included in an individual’s estate if they die within three years of making the gift; the potential of a ‘claw back’ of a portion of a 2012 if the exemption and tax rates are reduced; and the loss of a step-up in basis that property receives if the donor transfers the property at death.  It is therefore essential that anyone interested in making large-scale gifts consult with their attorneys, accountants and other advisors before making such a gift.

I don’t have $5.12 million.  Can I still make a 2012 gift?  You can and in some circumstances, you should.  Utilizing a portion of the full exemption can provide the same benefits to a person or family with a smaller taxable estate as it can to someone with a federal taxable estate.

Please contact info@levyestatelaw.com for more information about 2012 gift tax planning.