The repeal of the estate and generation skipping tax (GST) as of January 1, 2010, surprised most estate practitioners. The repeal kept the $1 million gift tax-free limit so estate planners were watching closely to see what Congress would do. In late 2010, the answer (and the opportunities) came.
Congress adopted the 2010 Tax Relief Act, which provides for reunifying the estate and gift taxes beginning Jan. 1, 2011, through Dec. 31, 2012. As a result, a donor now has a $5 million gift tax exclusion ($10 million for married couples). The act provides for a reduced gift tax rate of 35 percent. This rate and the $5 million exemption enable clients to focus on the opportunity for increased lifetime giving. Therefore, the making of large gifts is now less tax expensive. Gifting during 2011 or 2012 also shifts post-gift appreciation and income to a future generation. As such, gifting presents significant planning opportunities.
It is unknown if Congress will make the $5 million exclusion permanent after 2012, but the concern is that Congress could reinstate the $1 million exclusion of prior years. What happens if a donor uses his or her $5 million exclusion and it is not extended after 2012? In this event, a recapture, known as a claw back, will occur. How it will work is open to speculation. However, given the political nature involved, a number of estate planners believe Congress will not allow the $5 million exclusion to drop back to $1 million. They recommend taking advantage of the $5 million exemption and, if necessary, subsequently working through any claw back.
Notwithstanding a possible claw back after 2012, the potential post-gift appreciation, along with the income shift feature, still makes lifetime gifting of significant amounts (up to $5 million) a good estate planning technique. Gifting real estate interests, closely held business interests, and use of family limited partnerships are likely candidates for using at least part or all of the $5 million exemption. In addition, larger life insurance portfolios can be transferred to an insurance trust without tax concerns. In any event, at a minimum, clients should not overlook the annual gift tax exclusion of $13,000, which is a use-it-or-lose-it alternative.
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