Legislation in effect until December 31, 2012 makes the present a particularly important time for tax planning.  In late 2010, Congress passed and the President signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”).  The Act provides a two-year reprieve from higher tax rates and lower credit amounts that are typically characteristic of wealth transfer taxes, such as the estate tax, the gift tax and the generation skipping transfer tax.

The Act mandated a lifetime gift tax credit of $5,000,000 and a maximum rate of gift tax of 35 percent.  (The credit for 2012 is $5,120,000 as it is indexed for inflation.)  Be careful not to dismiss this opportunity because you say to yourself, ‘I don’t have $5,000,000, or anywhere close to it;’ you will have missed the proverbial boat.  Absent further action by Congress, the lifetime gift tax credit will return to $1,000,000 on January 1, 2013, and the maximum rate will jump to 55 percent.  As is obvious, 2011 and 2012 represent an unprecedented opportunity for gifting, even if you have less than the current credit amount.

Let’s say you currently have $1,000,000 that appreciates to $1,500,000 by the time you pass away.  Let’s further assume that the credit amount returns to and remains $1,000,000.  The difference between what you have and the credit amount will be subject to tax.  Gifting a portion of what you own this year presents the opportunity to save, in the case of our example, $200,000, assuming a 40% tax rate.


Consider another example: if you have $3,000,000 and die while the exemption is $1,000,000, your estate would owe $800,000, assuming a 40% tax rate.  If your surviving spouse, kids or other beneficiaries are stuck paying that tax bill, where will the funds come from?  Maybe there is enough liquid funds in your estate, but that eats away a large part of what you worked hard to accumulate and greatly shrinks what wish to pass on.

Be aware that any amount of gift tax credit used prior to 2011 serves to reduce one’s respective $5,000,000 credit under the Act.  For example, a person who used $650,000 of her credit prior to January 1, 2011 will be left with $4,350,000 during 2011 (or $4,470,000 in 2012) free of gift tax.


Notwithstanding the gifting opportunity afforded by the legislature, there are two financial issues to consider before making gifts.  First, the potential donor must ask whether she can afford to make the gifts and, if so, how much is prudent.  Second, one must ask whether it is likely that the donor will have a taxable estate at death and, if so, how important it is to avoid or minimize tax when compared with losing control over assets.  The potential donor should also consider the needs and planning desires of the person(s) she wishes to benefit.

As for timing of gifts during the temporary tax respite, there are two initial tax considerations.  First, if the assets to be gifted are expected to greatly appreciate before the end of 2012, gifting should be completed sooner rather than later.  On the other hand, there is wisdom in waiting until the second half of 2012 in hopes there will be more clarity as to post-2012 law.  Both points are now made moot by the passage of time, and both would have likely proved fruitless, depending on the nature of the assets held.  The unfortunately depressed market probably subverted any planning based on the first consideration.  The second issue has not proved any use as Congress has failed to act and there is no real sign of future action.

Beyond the two initial considerations, there is the issue of potential tax consequences based on the timing of the gift.  A decision as to when to transfer assets may result in very distinct outcomes.

Perhaps this hypothetical will help show the potential for different outcomes: assume that an aging parent owns $7,000,000 in stock with nearly zero tax basis.  A gift of this stock from the parent to a child takes advantage of the currently unprecedented gift tax credit.  On the other hand, it also transfers the extremely low cost basis on to the child as it is a lifetime transfer.  If the child were to sell the stock during her life, it would trigger a much significant capital gains tax.  However, the parent’s estate (and the child’s inheritance) saves nearly $2,000,000 in tax, assuming a 40% rate.

Another consideration is that while a lifetime transfer will avoid a large gift tax bill, if the parent passes away during the next three years, the transfer would be pulled into his gross estate for estate tax purposes, essentially undoing the purpose of the lifetime gift.

Waiting until the time the parent passes away to transfer the stock also has an upside and a downside.  A transfer at death provides a stepped-up basis in the stock, resulting in a lower capital gains tax if the child were to sell the shares during her lifetime.  The downside is that we cannot know how much the credit will be in the future.  More than likely, the credit will not remain at its current level.  It will probably be significantly lower (and the rates significantly higher); however, we cannot reliably predict the coming action of Congress.

As you can see, there are many variables to think about.  Unfortunately, the opportunity is quickly coming to end.  Waiting until the midnight hour will not only frustrate you and create a greater expense to give effect to your gifting wishes, it may completely thwart them as a thorough gifting program will take some time to carry out.  Call our attorneys today for guidance and options to take advantage of this temporary and fleeting tax-saving opportunity.

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