In 2012, the federal gift and estate tax exemption is $5,120,000. If Congress does not change the law, this exemption will drop to $1 million in 2013. Minnesota does not have a gift tax, but it does impose estate taxes on estates valued at more than $1 million.
There are several reasons why donors should consider making gifts in 2012 to take advantage of the increased federal gift tax exemption before it expires:
- Giving away assets during lifetime shifts future appreciation of those assets out of the donor’s estate.
- Children and grandchildren often need the money the most when they are younger, making the gift even more appreciated by the recipient during a donor’s lifetime rather than at death.
- Donors whose children are also in top estate and gift tax brackets may wish to create “generation skipping” trusts which last for a child’s lifetime and then can pass to the child’s descendants tax free. The child can be the primary beneficiary during his/her lifetime, if the assets ever are needed by the child; but if not, the child can have the power to direct distributions of principal to his descendants during the child’s lifetime and by his or her will, and can vary their shares should this be appropriate. Preserving assets free of estate taxes for several generations can be a very powerful tax savings device.
- Unified with the gift tax, there is no federal estate tax if the amount of aggregate lifetime gifts plus the value of the estate at death in 2012 is $5,120,000 or less.
- The disadvantage to gifting some assets during life is the donee’s basis in the asset is the same as the donor’s in a situation where the gift has increased in value since the acquisition of the asset by the owner. For instance, a cabin that was acquired by the donor for $50,000 in 1960 but that is currently valued at $150,000, will be transferred with a basis of $50,000 to the recipient in 2012. If this cabin was transferred at death, it would be eligible for “stepped-up basis” and would be passed to the recipient with a basis at the fair market value at the date of death. This means that if this cabin was transferred as a lifetime gift and was eventually sold by the recipient, he or she would pay tax on the built-in gain.
Now is the time to consider making large family wealth transfers without incurring gift or estate taxes. The estate planning attorneys at Briggs and Morgan can help you to tailor your estate plan to your specific needs so that you can obtain maximum benefit from these beneficial tax law changes.