Source: 2010 Tax Relief Act
Applies only to 2011 and 2012
For wealthy individuals – those with assets of at least $2 million to $4 million – 2011 and 2012 represent a favorable time to make gifts, as the federal gift-tax exemption has been raised to $5 million for the next two years.
The previous gift-tax exemption figure stood at $1 million for individuals and $2 million for couples. The recent changes adjust those figures to $5 million and $10 million, and decrease the tax rate on gifts above those amounts to 35 percent – down from the scheduled 55 percent.
The recent changes also align gift, estate and generation-skipping taxes - meaning a married couple can spend their combined $10 million exemption to avoid a combination of the three taxes.
Additionally, the $5 million gift-tax exemption is separate from the annual gift exclusion of $13,000, and is portable - which allows a surviving spouse to use the amount of estate and gift tax exemption not used by the decedent spouse.
Experts quoted in the Wall Street Journal, advise people with assets approaching the current $5 million or $10 million exemptions to think hard about making tax-free gifts now, as doing so will shield future asset appreciation from taxes.
“If you are single with assets of $4 million or more, or married with $8 million or more, you should definitely look at making gifts,” said Philip Kavesh, an attorney at Kavesh, Minor & Otis in Torrance, CA.
For individuals or couples below that asset-value level, making gifts could still represent a smart tax move, as those people might get caught if the individual estate-tax exemption drops back to $3.5 million - its 2009 level - or even $1 million, as the 2013 law now stands.
According to a 2007 Federal Reserve Survey of Consumer Finances, 5.4 million households had net worth of $2 million or more.
“In the next two years, wealthy people have an unprecedented opportunity to push a lot of the value of their assets out of the estate-tax system,” Kavesh said in the Wall Street Journal article.
For Ray Maggi, founder of Orange County, Calif.-based MPMS Inc. – a company that owns and manages apartments – the new gift-tax exemption will allow him to move as much out of his estate as possible.
The aforementioned article details Maggi’s plan to part with his entire exemption, which shows how complicated gifting strategies can be.
The setup involves an existing trust, a loan from Maggi, and a sale of shares in his privately held property at a large discount – along with other tax-saving moves. The plan also depends in part on his business’s cash flow holding up.
For individuals and couples who can’t or don’t want to make large gifts in response to the government expanding the gift-tax and estate-tax exemptions to $5 million and $10 million, experts urge that you review your will—especially if it has one or more trusts.
Note: Tax rules are extremely complicated. Always consult a tax lawyer before making any tax planning decisions.