You Can’t Take it With You…

For individuals with substantial estates, 2012 presents what may be a “once in a lifetime” opportunity to take advantage of the Federal gift tax exemptions.  Gifts to family members can be a favorable way to “shrink” your estate to avoid estate tax on death.  Here is a summary of what you can give away in 2012 free of Federal gift tax:
  • $13,000 per recipient ($26,000 if your spouse joins in the gift) to an unlimited number of recipients.  So if you have 3 children and 5 grandchildren, you and your spouse can give away $208,000 in 2012 free of Federal gift tax.  In addition, you do not have to report these gifts on a gift tax return and these gifts will not be deducted from your lifetime $5.12 million gift tax exemption.
  • Up to $5.12 million (your current lifetime gift tax exemption) – at least up until December 31, 2012.  After that date Congress is likely to reduce the lifetime exemption, possibly to as low as $1,000,000.  At this writing it is uncertain where Congress will come down on this issue, although the current $5.12 million exemption is not likely to survive.  Gifts that utilize your lifetime exemption must be reported on an annual gift tax return.
  • Gifts to a spouse are not subject to gift tax.
  • Gifts to a qualified charity are not subject to gift tax.  An additional benefit to charitable gifts is their eligibility for a charitable deduction on your Federal income tax return.

Because the current lifetime gift tax exemption of $5.12 million per person is likely to drop after December 31, 2012, this year presents significant planning opportunities for wealthy individuals who wish to reduce the size of their taxable estate for Federal estate tax purposes.  However, while it is simple to articulate that a husband and wife could give away up to $10.24 million during 2012, thereby significantly reducing the size of their Federal taxable estate, the potentially large tax savings is offset by the notion that you must actually and irrevocably give away this much money or property.  Writing a check this large, even if payable to family members, requires a hard swallow and raises significant collateral questions.  Will you have enough left to live comfortably after the gift?  Are the recipients of the gift capable of managing it properly?  Compounding the dilemma is the fact that to qualify as a gift, the donor must retain no control whatsoever as to its ownership or use by the recipient.  There are no easy answers to these thorny questions.

Where Congress goes after December 31, 2012 remains a mystery and we will do our best to keep you informed on this important issue. 

— Kevin Palmer


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