Time
is Running Out to Save Unprecedented Amounts in Taxes
For the rest of 2012, every
American can transfer up to $5.12 million free of federal gift, estate and generation-skipping
transfer tax—and estate planners are doing everything they can to motivate
their clients to take advantage of this unprecedented opportunity.
To understand why this
is such a big deal, we only have to look at recent history. From 1987 through
2001, the federal estate tax exemption—the amount of assets an individual can
leave to others without having to pay estate taxes—increased from $600,000 to
just $675,000. Then the Bush tax cuts went into effect, and the exemption
increased from $1 million in 2002 to $3.5 million in 2009. When Congress failed
to change the law, the estate tax was repealed in 2010, so there was no estate tax on estates of those who
died that year.
At the end of 2010, just before the exemption was scheduled to revert
to $1 million in 2011, Congress and the President reached an unexpected
agreement. The result was a $5 million exemption for 2011 and 2012 that applied
not just to estate taxes but also to lifetime gifts and the generation-skipping
transfer tax. This is important because even under the original Bush tax cuts,
when the highest estate tax exemption was $3.5 million, lifetime gifts were
limited to $1 million. (The amount for 2012 was adjusted for inflation,
resulting in the $5.12 million exemption.)
Consider the impact on
estate planning for the rest of this year:
* Every
American has a $5.12 million exemption in 2012, so a married couple can
transfer up to $10.24 million out of their estates.
* You
don’t have to die in 2012 to use this exemption. It can be used to make gifts
and transfers now, while you are living.
* Transfers
do not have to be made in cash or liquid assets. Illiquid assets, like a
business, home or other real estate can be transferred to a trust. If you
transfer your home, you can continue to live there and take the tax deductions.
If you transfer your business, you can do it in such a way that you can keep
control and receive the income. Future appreciation of these assets will not be
subject to estate tax, and current depressed values will result in favorable
valuations.
* The
full $5.12 million exemption does not have to be used in order to benefit.
Those with $1 million to $5 million in assets can save substantial amounts. And
those with less than $1 million should consider some planning to prevent future
tax liability.
* There
are proven estate planning techniques available now (discounting, family
limited partnerships, grantor trusts, etc.) that may soon be eliminated as
Congress looks for more ways to raise revenues.
Coupled with the $5.12
million exemption and historic low interest rates, families can transfer significant
assets at little or no tax.
Under current law, if
Congress does not act by the end of this year, the exemption in 2013 will be
just $1 million. No one knows what will happen with the law in the future, but
it is likely that the gift tax
exemption will fall significantly, probably to $1 million. This is true even if
the estate tax exemption stays the
same or falls to a lesser number, like $3.5 million.
Bottom line, after
December 31, 2012 this gift from Congress will likely disappear and
not return. If you have questions, contact a Silicon Valley Estate Planning Attorney today.
