The tax laws in place for 2012 are the most favorable they have ever been for wealthy individuals who would like to make gifts to their loved ones without paying any gift tax.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”)  provides for the following:

  • There is an estate, gift and generation-skipping transfer (“GST”) tax exemption of $5.12 million per person and $10.24 million per married couple for calendar year 2012;
  • The tax rate of 35% for estate, gift and GST taxes over the exemption will continue through December 31, 2012; and
  • The gift tax annual exclusion for 2012 is $13,000 per donee per year from each (single or married) individual or $26,000 per donee per year from a married individual (if the non-gifting spouse consents to gift-splitting).

If Congress does not extend the Act, on January 1, 2013, the estate and gift tax exemptions will automatically be reduced to $1 million per person and $2 million per married couple, and the GST tax exemption will automatically be reduced to $1.4 million per person and $2.8 million per married couple.

Even if Congress takes steps to change the law for 2013, the laws may not be as favorable as they are now. On February 13, President Obama released his budget proposal for 2013. The President’s proposal for 2013 includes the following:

  • There would be an estate and GST tax exemption of $3.5 million per person and $7 million per married couple for calendar year 2013;
  • The gift tax exemption would revert to $1 million per person and $2 million per married couple for 2013; and
  • The maximum tax rate for estate, gift and GST taxes over the exemption would be 45%. 

There is a strong possibility that the available gift tax exemption in 2013 will be much lower than its current level of $5.12 million.  If you have assets that you can afford to live without, we encourage you to consider making large gifts to your loved ones by December 31st.  By making gifts in 2012, you will shelter assets from federal gift, estate, and generation-skipping transfer taxes.  If you live in a jurisdiction that has its own estate tax, such as the District of Columbia or Maryland, lifetime gifts also allow for a reduction of the estate for state estate tax purposes.