The $5.12 million federal gift and estate tax exemptions and 35% tax rate signed into law by the President in late 2010 are set to expire on January 1, 2013.  Unless Congress takes further action, the exemptions and rate will revert to $1 million and 55%, respectively, in less than four months.

The 2010 law also increased the generation-skipping transfer (GST) tax exemption to $5.12 million exemption with a GST tax rate of 35%.  This exemption and rate likewise will revert to approximately $1 million and 55%, respectively, on January 1, 2013.

Clients who do not make gifts in 2012 to utilize their $5.12 million gift tax exemption will lose the ability to do so if the law reverts as scheduled.  The GST exemption of $5.12 million further maximizes tax savings by allowing gifts to go on for generations.

Some gifting techniques that may be suitable for clients wanting to use their exemptions this year include:

  • Outright gifts, including gifts to equalize prior gifts to children and grandchildren
  • Loan forgiveness
  • Gifts in trusts for children and grandchildren, including gifts to “dynasty trusts” that last for generations and even perpetually
  • Gifts of business interests as part succession planning or to consolidate family holdings
  • Gifts to trusts that combine a trust’s estate and gift tax benefits with income tax benefits
  • Gifts to trusts of which a spouse is a beneficiary, which may be particularly suited for individuals wanting to take advantage of the historic gift tax exemption without cutting off a spouse’s assets to funds
  • Gifts of a residence to qualified personal residence trusts
  • Purchasing a single premium life insurance policy to be held in trust for liquidity reasons, which may be particularly suited for business owners