The 2010 federal estate and gift tax law provided good news for wealthy taxpayers: a lower maximum tax rate of 35%; estate, gift, and generation-skipping transfer tax exemptions of $5 million ($10 million for a married couple); and estate and gift tax “exemption portability,” which allows a surviving spouse to increase his or her own lifetime exemption by the exemption a predeceased spouse never used. However, these favorable rules are scheduled to expire at the end of 2012, unless Congress chooses to extend them in the same or a modified form. (Congress also has the power to take that action after the end of 2012 and make it retroactive.) At press time for this Alert, no one in the world truly knows what Congress will do before the end of this year, or what the federal estate and gift tax law will look like in 2013 and beyond.

What should you do before the end of 2012 if you are worried about possibly having to pay a big estate tax bill if the laws are not as favorable when you pass away as they are for 2012? First, you have to determine whether you can afford to make larger gifts now in order to increase the possibility of paying lower taxes in the future. If you feel you have more than you need for your own comfort and security, then you should consider using all or part of your 2012 lifetime exemption this year before its possible reduction. But how much benefit that produces for you and your loved ones will depend on exactly what Congress decides to do. Effective gift analysis will raise a lot of questions:

  • How much (if any) can I afford to give away at this time in order to take advantage of this year’sexemptions?
  • If I choose to make large gifts this year, should I give those amounts directly to my children or in trust for the benefit of my descendants?
  • Am I interested in “generation-skipping planning” to reduce the estate and gift taxes my children may have to pay in the future?
  • How much control can I keep over what I give away if I choose to do so? Am I allowed to benefit from what I have given away? What about my spouse?
  • Do any of the potential planning opportunities present much risk of a tax audit or of unpleasant rigmarole? What is my appetite for risk and rigmarole?

Every client will answer these questions differently, and there is no “one size fits all” answer. But with the possibility of major law changes at the end of 2012, it is a good idea to schedule a meeting with us to see if any planning opportunities are right for you.

Gift-making is a complicated subject, and we have not covered a lot of issues – including non-tax issues – that could affect your decision-making. The purpose of this Alert is to make sure you know that there are some special reasons to consider some larger gifts this year. We can move from the generalities dealt with here to your family’s specific facts when we get together. The best tax planning is always tailor-made!