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News and Articles from the Law Offices of John C. Martin

Take Advantage of the Gift Tax Exemption

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Take Advantage of the
$5.12 Million Dollar Gift Tax Exemption . . . Before it’s too late.

 There has been a lot of media coverage about the Bush tax
cuts that are set to expire on December 31, 2012 and whether they will be
extended for all taxpayers or if they will be discontinued for top earners. But
not nearly as much has been said about the current estate and gift tax rates
that are also due to expire on December 31.

 What we have for the next few
months is an historic opportunity in estate planning. At the end of 2010,
Congress put in place a two-year estate tax provision that included a huge gift
no one had been expecting: a $5 million gift and estate tax exemption, the
highest it has ever been. It was indexed for inflation for 2012, making it even
higher—$5.12 million—but for this year
only
.

 Not nearly enough people have taken advantage of this. Some
think it doesn’t apply to them because their net estate is less than $5.12
million, and others think they can’t use it because they don’t plan to die in 2012.
But they are mistaken, and are likely missing the chance of a lifetime when it
comes to estate planning. Here’s why 2012 is such an incredible year for estate
planning.

*    This is a combined gift and estate tax
exemption, so you don’t have to die in 2012 to use it. It can be used to make
gifts in 2012 and still exclude up to $5.12 million from estate taxes when you
die, regardless of the amount of the estate tax exemption at that time. The
exemption is per person, so a married couple can give twice this amount, or up
to $10.24 million.

*    Under current law, this $5.12 million
exemption will decrease to just $1 million on January 1, 2013 and the top tax
rate will increase from 35% in 2012 to 55% in 2013. Those with estates over $1
million who do not plan now and who die in 2013 (and quite possibly in later
years) will pay considerably more in estate taxes—and leave that much less to
loved ones.

*    The generation skipping transfer (GST) tax
exemption is another reason to plan this year. This tax applies when assets are
transferred (by gift or inheritance) to a grandchild, great-grandchild or other
person more than 37.5 years younger than the person making the transfer. The
GST tax is equal to the highest federal estate tax rate in effect at the time
and is in addition to the federal estate tax. In 2012 the exemption for the GST
tax is also $5.12 million ($10.24 million for married couples) and the tax rate
is 35%. Next year, the exemption will be about $1.4 million and the top tax
rate will be 55%. Planning now allows considerably more to be given to
grandchildren and future generations without incurring this onerous tax.

*    In 2012, estate planners have options that
are considered “standards.” For example, gifts can be made using life
insurance, various trusts, family limited partnerships and others, often using
discounted values that leverage exemptions, without
losing control
. But these may soon be history as lawmakers search for more
ways to generate revenue and close perceived loopholes.

*    Lastly, interest rates (bound to increase in
2013) are at historic lows and thus there has never been a better time to do
intra-family loans and other interest-rate-sensitive planning.

Of course, Congress could change the laws before January 1
but, based on recent history, that seem unlikely. Even if Congress does change
the laws, we have no idea what the new ones will be. It’s best to plan based on
what we know—not on what we think might happen. This once in a lifetime
opportunity is about to expire. You don’t want to miss it.

If you have more questions, contact a Menlo Park Estate Planning Attorney today.

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