The unified gift and estate tax exemption for 2012 is $5,120,000 per person (including generation-skipping gifts and bequests), and the estate and gift tax rate is 35%. Unless legislation is enacted, beginning January 1, 2013, the unified estate and gift tax exemption will be reduced to $1,000,000 per person; the tax rate will increase to 55%. Additionally, taxpayers can take advantage of the current annual gift tax exclusions for gifts of $13,000 per donee ($26,000 for a married couple).

This year, 2012, presents a unique opportunity to make large amounts of gifts tax-free. However, it is important to determine if you want to gift a significant amount of your wealth to your heirs, and if you will retain enough liquid assets and cash flow to live comfortably in the future.

What Will Congress Do?Currently, there are a variety of tax proposals, and tax professionals predict that after the election, there could be a political compromise, extending the $5 million exemption or some amount greater than the $1 million. However, there is no certainty at this time as to what will happen to the exemption amount or the tax rate.

Is a Clawback of a 2012 Gift Tax Exemption Possible?If, by doing nothing, Congress allows the exemption to be reduced after December 31, 2012 to $1,000,000, then Congress could require a recapture or "clawback" of the exemption amount utilized over the $1,000,000 amount. However, many tax professionals feel it is unlikely that Congress would attempt such a clawback of the 2012 higher gift tax exemption. Even if Congress were to enact such a clawback, the income and appreciation from your 2012 gifts would still inure to the benefit of the recipients of the gifts.