There exists right now a brief window of opportunity regarding family gifting. The Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2011 (2010 Tax Act) increased the lifetime gift tax exemption to $5 million in the year 2011, with an inflationary adjustment, to $5.12 million in 2012. The 2010 Tax Act will no longer be in effect after Dec. 31, 2012, and according to the current law, the lifetime gift tax exemption is scheduled to revert to $1 million on Jan. 1, 2013. Until then spouses who have not previously made substantial gifts have the ability to transfer up to $10.24 million to friends and family or to trusts for them, if the gift is made before Jan. 1, 2013, with maximum rate schedules at 35 percent.
Through the remainder of this year, a number of opportunities for wealth planning are available. It is impossible to know what Congress will do, if anything, to prevent the scheduled exemption reduction to $1 million in 2013. As a result, the amount of the gift tax exemption after Dec. 31, 2012 remains unclear. Thus, it may be prudent to consider certain wealth planning vehicles to utilize the benefits of the current exemption of $5.12 million effectively while in effect, even if your total assets do not meet the $5.12 million and $10.24 million thresholds.
Some of the benefits and opportunities of a gifting program utilizing all or a part of the lifetime exemption are as follows:
1. Reduction in Estate Tax: If the exemption is reduced in future years, a current lifetime gift can substantially reduce the estate tax burden to a family on the death of the donor. In many cases, a current gift of $5 million can reduce the estate tax burden by 40 percent of the gifted amount, or $2 million, thereby increasing by that amount assets ultimately available to the family, all assuming the exemption is reduced to $1 million as scheduled. Gifts can also reduce the state estate tax burden that exists in many states.
2. Removal of Future Appreciation From Tax: A current gift removes any appreciation on the gifted asset from the estate. Thus, if $5 million is given today of an asset likely to appreciate (say real estate or traded stock interest) and the gifted asset increases to $10 million, the $5 million of appreciation is not includible in the donor’s taxable estate.
3. Retention of Control and Income From Gifted Assets: Some donors are concerned over the loss of control and loss of the income of gifted assets. It is possible to design a gift-giving program between spouses so both spouses continue to retain significant control over the gifted assets and simultaneously retain the economic benefits of the gifted assets. For instance, spouses may establish trusts for each other for their joint lives, and thereafter for family members, utilizing their available gift tax exemptions, ultimately permitting up to $10.24 million plus appreciation to pass to family members without estate tax consequences. The design of such trusts must carefully conform with case law and IRS rulings to achieve the intended result.
4. Retention of Control and Annuity Stream for Designated Period: Gifts can also be made to Grantor Retained Annuity Trusts (GRATs) in which the grantor retains control over the gifted asset and retains an annuity stream for a designated period of time, which may be many years or as short as two years. At the end of the designated period, the asset may pass to family members without gift or estate tax consequences, depending upon the duration of the trust and the amount of the annuity stream passing tothe grantor. To be successful, the grantor must survive the trust term.
5. Protection From Creditors and Spousal Claims: Gifts can be directed to pass to trusts for family members in a manner that protects the assets from the potential creditors of the donees and from matrimonial claims of spouses of donees.
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