The following discussion is for general informational purposes only. The estate planning techniques described below should not be undertaken without consultation with your estate planning attorney.
What estate tax-savings opportunities exist in 2012? In 2012 the per person estate and gift tax exemption is $5 million. But on January 1, 2013, the exemption is scheduled to drop to $1 million. So what happens if someone makes a gift of $5 million to his children in 2012 and the exemption then drops to $1 million? No one knows for sure, but most commentators believe that $4 million of that gift will have been made free of estate and gift tax consequences. That’s the opportunity. (The other $1 million will simply use up the exemption.) Click on this link for a discussion of the federal estate and gift tax system. Of course, if a husband and wife both make $5 million gifts, the potential exists to remove $8 million from their estates free of estate and gift tax consequences. That could potentially save over $4 million in estate taxes.
What if the gift is less than $5 million? If the conventional wisdom is correct, then any gifts made in 2012 that bring the taxpayer’s total lifetime taxable gifts over $1 million will be tax-free gifts to the extent they exceed $1 million.
What if the exemption stays high? Sometime before (or after) January 1, 2013, Congress and the President might agree to keep the exemption at $5 million. If that happens, there will have been no unique opportunities in 2012. Alternatively, the exemption might be set at $3.5 million. If that happens, $1.5 million of that $5 million gift will be a “free” gift (i.e. a gift with no estate or gift tax consequences). (The other $3.5 million of the gift will simply use up the exemption.) But no one really knows what the folks in Washington will do.
What if I don’t want my kids to receive that much right now? The gifts need not be outright. They can be contributed to irrevocable trusts for the children’s benefit. The children need not receive any benefits now at all. Click on this link for a discussion of irrevocable trusts in Utah.
Are there downsides to making the gifts? Potentially, yes.
First, if the gift consists of property other than cash, the recipient of the gift will receive the donor’s income tax basis in the gifted property. By contrast, if the donor holds onto the property until death, it will receive a step-up in basis to fair market value at that time. Thus, if the exemption remains at $5 million, capital gain tax will have been unnecessarily incurred. So be careful about gifting low basis property if the donor has a short life expectancy. Click on this link for a discussion of stepped-up and carry-over basis.
Second, the gift must be irrevocable, and no one should make large gifts if doing so will jeopardize their financial security or their ability to live in their accustomed manner of living.
Third, the property may depreciate in value. If it does, the benefit of making the gift may be diminished. In these uncertain economic times, this possibility should not be overlooked.
Can I be a beneficiary of the trust? In general, you cannot be a beneficiary of a trust to which you make a gift and also exclude the trust assets from your estate for estate tax purposes. But there may be exceptions to this. You should speak to your estate planning attorney.
Rust Tippett is the author of this blog post.
Copyright 2012 UNLEPI, LLC, a Utah limited liability company. All Rights Reserved.
This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, P.C. The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.