Under current laws set to expire on December 31, 2012, each person has the ability to give away up to $5,120,000 without the imposition of a gift tax or a generation-skipping transfer tax. To the extent that gifts are made that exceed this exemption level, a transfer tax is assessed at a 35 percent rate.
Unless Congress passes new legislation before year-end, beginning January 1, 2013, the amount that can pass gift tax-free will be lowered to $1,000,000 and the amount that can be transferred to future generations free of generation-skipping transfer tax will be reduced to $1,400,000. Transfers in excess of these levels will incur gift taxes and, if applicable, generation-skipping transfer taxes at a 55 percent rate. Due to the expiring tax exemptions, it is critical to consider gift-giving strategies that can be implemented before the end of the year.
Consider Taking Action Now
Given the uncertainty regarding future congressional action, there is a possibility that we might not see the current exemptions amounts again. Therefore, consideration should be given to making sizeable gifts in 2012 to take advantage of current estate planning opportunities. Such transfers can take many forms, including both outright gifts and gifts in trusts. Prospective recipients of such gifts can include children, grandchildren and others. If the gift is in trust, it can be structured to provide maximum flexibility through selection of trustees and accessibility to beneficiaries.
Tax Proposals for 2013
Congress eventually will update the transfer tax laws, but it is uncertain when this will occur and how extensive the changes will be. It is possible, for example, that Congress will extend the current laws for a short period of time so that changes can be made in 2013 as part of a significant overhaul of the tax code.
It is important to note that President Obama’s 2013 budget proposes a different transfer tax regime: a $1,000,000 gift tax exemption, a $3,500,000 generation-skipping transfer tax exemption and a tax rate for each of 45 percent. Other transfer tax related proposals advanced by the Obama administration include each of the following:
- grantor retained annuity trusts (GRATs) would require a minimum term of 10 years, which could significantly reduce the effectiveness of this popular tool
- valuation discounts would be curtailed for family-controlled entities
- grantors of trusts, who are taxed on the income of trusts, would have the trust assets included in their estates for estate tax purposes
- long-term trusts would be limited to 90 years for generation-skipping transfer tax purposes
Such future uncertainty makes planning in 2012 especially important. Please contact us to discuss further these transfer tax planning opportunities.