Expiring Tax Law May Take Substantial Opportunity With It

Back in December 2010 there was a much reported flurry of work done on changes to the US Tax laws. One of the big changes was to increase the amount an individuals could pass free of estate or gift (“transfer”) taxes. The changes made it possible to pass during $5,000,000 you life or at death (or combination thereof) without paying either of the transfer taxes. This “exemption amount” was substantially more than in prior years. (The amount is adjusted for inflation and is $5,120,000 for 2012.) Additionally, the then new law made it possible for spouses to share this amount so that a surviving spouse could use any unused portion of a predeceased spouses $5,000,000.

This new exemption equivalent, along with the continued annual $13,000 annual exclusion, now made it possible for business owners and families with highly appreciated assets or businesses to pass substantial wealth to their families transfer tax free. That is not to say only people with more than $10,000,000 can benefit, but everyone with more than $1,000,000 in estate taxable items may find advantages.

However, this unprecedented opportunity is time sensitive. Unless acted on by Congress this $5,000,000 plus exemption from the estate and gift tax will revert to a decreased combined $1,000,000 on January 1, 2013, and the marginal (highest) transfer tax rate (the tax charged on amounts over the exemption amount given at death or during life) will increase from 35% to 55% at the federal level.

The increased exemptions present many unique opportunities to magnify the benefits of substantial gift giving by the end of 2012 including:

1. Since New York State does not have a gift tax, a lifetime gift not only can take advantage of the increased federal gift exemption, but can also reduce the size of your estate subject to state estate tax (which in New York has a lower $1,000,000 exemption). This could save as much as $387,000 on estates reduced from five to one million dollars before death.
2. Even if estate tax exemptions remain high, the gift tax exemption, which was increased to equal the estate tax exemption, may again be “decoupled” from the estate tax and revert to the $1,000,000 lifetime gift limit with a higher total passable at death, as was done for 2008-2010. This would limit lifetime gifts and possibly trap increased value for assets in your estate.
3. Gifting is especially important if you have assets that are expected to highly appreciate, such as stock of a closely held business, because a gift now will keep the appreciation from being included in your taxable estate.

Gifting or transfers need not be made directly, but can use trusts to allow certain a certain level of control over the gift.

Whether or not you decide to do anything (there may be non-tax reasons for taking no action) it is important for families to engage in a thoughtful decision-making process and planning now, so that they can transfer wealth in a way that best meets their objectives and protects their family. If you or anyone you know might benefit from this soon expire benefit, the time to act is now.