At the end of 2010, Congress raised, for two years only, the lifetime gift, estate and generation-skipping transfer tax (GST) exemptions. Until the end of 2012, the individual exemption is $5.12 million, and the combined exemption for married couples is $10.24 million. In addition to the exemption increase, Congress temporarily decreased the highest marginal rate of tax to 35 percent for those two years.
No one can predict whether Congress will extend the current exemption level and rate beyond 2012. If the two political parties are unable to agree, and the law is allowed to lapse, pre-2001 law will apply. The estate and gift tax exemptions will drop to $1 million ($2 million for married couples), and the highest marginal rate of estate and gift tax will increase to 55 percent. (In 2013, the GST exemption will drop to about $1.4 million because of an inflation adjustment provision in the law that would come back into effect.)
This means that using your remaining gift tax exemption before the end of the year could save your heirs as much as $2.2 million in estate tax later. The savings double if both spouses use their full available exemptions this year. Even if the exemption decreases only to $3.5 million, the savings from a gift of $5.12 million will be significant.
In addition, lifetime gifts remove from your estate the future appreciation and income earned on the gifted assets so that your heirs would enjoy additional tax savings of as much as 55 percent of that appreciation in value whether or not the exemption is reduced.
Many of our clients already have implemented gifting strategies that have taken advantage of this opportunity. Most gifts have been to trusts that will protect for future generations the assets not only from transfer taxes but also from claims by creditors or divorcing spouses. However, gifting techniques vary widely with each client, and there is no one gifting strategy that will suit all clients’ assets or estate planning goals. Individual circumstances must be taken into account. For example, gifted assets retain their original tax basis for capital gains purposes while assets passing through an estate receive a new basis equal to date of death value. Thus, assets with a potential for future appreciation are better candidates for a gift than assets that have significant built-in gain. Plus, no one should make gifts that would jeopardize their ability in the future to maintain a comfortable lifestyle or be prepared for financial emergencies.