By Steven Goldberg and Ronald Wargo
The clock is ticking on what may be a unique estate planning opportunity. At the end of 2010, Congress increased the estate and gift tax exemptions to $5 million, effective for two years.
As presently enacted, that will be the law only until Dec. 31, 2012. If no action is taken by Congress at that time, then, beginning on Jan. 1, 2013, the total exemption will revert to roughly $1 million, including both lifetime gifts and assets passing at death.
Additionally, the tax rate on any amount over $1 million will increase from the present 35 percent to 55 percent.
At this juncture, no one knows what Congress and the President will do. Much will obviously depend on which political party controls one or both houses of Congress as well as the Presidency. Many observers believe that Congress will reduce the estate tax exemption to $3.5 million to match what existed in 2009.
Even if Congress makes this change, it is not clear whether the gift tax exemption would also be set at $3.5 million or if Congress will set the gift tax exemption back at $1 million, which was the law in 2009. Further, it is not clear if Congress will act this year or next or at all. In short, it is anyone’s guess as to what may be done.
Due to this uncertainty coupled with this opportunity, for people who are in a position to make gifts to heirs, 2012 is the year to do it. This is especially true for higher net worth individuals.
Obviously, no one should make gifts that leave them in an economically compromised position. However, if you are in a position to be able to make a gift, now is the time. For married couples, planning can be implemented that allows at least one spouse’s exemption to be used and still allow the other spouse to be able to benefit from the assets used to make the exemption. Also, any appreciation or income the transferred asset generates is not subject to estate tax.
It is important to begin thinking and planning the gift as soon as possible. Waiting until the last half of the year will unnecessarily hurry the planning process and possibly eliminate some of the options that might otherwise be available. If you wait too late in the year, there simply may not be enough time to use the higher exemption.
Given these circumstances, we suggest you consider exploring your options in the first quarter of this year.
Two other factors should also be considered.
First, we understand that many people who can and want to make gifts will not be able to use the entire exemption or even a majority of it. However, if you are considering making a substantial gift, 2012 may still be the best time to do it.
A gift made this year that is significantly less than $5,120,000 will have a very substantial buffer against actually having to pay a gift tax. (Since the gift tax exemption was indexed for inflation, the 2012 limit is actually $5.12 million.) Since the gift tax exemption could be dramatically reduced, that buffer may not be available next year. This could be very important, for example, if a gift would consist of real property, where valuation could be an issue.
Second, many people are concerned that making an outright gift to heirs would expose assets to potential problems in the future, either from creditors of the recipient or because the recipient may not manage the property well. To protect against this concern, we generally recommend using a trust when making a substantial gift. Trusts generally provide significant protection from creditors and the assets can be managed by almost any third party. Thus, assets can be protected both for current and future generations.
Steven M. Goldberg is a partner in the firm Friedemann Goldberg. Mr. Goldberg practices in the areas of estate planning, tax, trust and estate administration and business law (707-543-4900, firstname.lastname@example.org). Ronald P. Wargo II is a partner in the firm. He practices in the areas of estate planning, business law, and intellectual property (707-543-4900, email@example.com).
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