The Opportunity to Take Advantage of Favorable Tax Laws is Expiring

7/11/2012 Articles

Preferential gift and estate tax treatment afforded under current law is set to expire on December 31, 2012. You should consider taking steps now to take advantage of the favorable tax laws before year-end.

Under current law for 2012, each person has the ability to gift or dispose of assets at death of up to $5,120,000 without the imposition of a gift tax, estate tax or a generation-skipping transfer tax. To the extent a gift or estate exceeds the exemption amount of $5,120,000, a transfer tax is imposed at the reduced rate of 35%.

Unless Congress passes new legislation, the amount that can pass free of gift or estate tax will revert to $1,000,000 on January 1, 2013.  Transfers in excess of this amount will incur gift or estate tax at much steeper rates, reaching 55 percent at $3,000,000.

Planning Opportunities for 2012

  1. Outright Gifts.  The increased $5,120,000 gift tax exemption creates an opportunity to give away up to $5,120,000 of assets by the end of the year without paying the 35% gift tax.  In addition, gifts in excess of the $5,120,000 exemption amount will be taxed at the lower 35% rate.  Furthermore, under current law (which legislators have proposed changing), gifts of fractional interests in real property and minority interests in businesses may be “discounted,” or valued to reflect the lack of marketability and control associated with the gifted interest.  For example, a gift of a 20% interest in a business worth $10,000,000 might be valued for gift tax purposes at $1,500,000 rather than $2,000,000.
  2. Gifts in Trust.  If you are not yet ready to transfer significant wealth to your children or grandchildren outright, consider making such gifts in trust which can become available to your designated beneficiary at a chosen age or be maintained for generations. 
  3. Life Insurance Trusts.  Consider transferring existing life insurance policies to a trust for the benefit of your children or contributing funds to a trust to purchase a new policy.  The policy proceeds received by the trust can be distributed at your death or at a later time. In addition to avoiding estate tax through the use of a life insurance trust, insurance policies have attractive income tax benefits. 
  4. QPRT Trusts.  Qualified Personal Residence Trusts are a perfect way to transfer your primary home or vacation home to your children over time.  As a result of depressed real estate prices, now is an opportune time to gift a residence. 

We urge you to act quickly if you would like to take advantage of any of these planning opportunities.  If you are considering transfers of real estate, partnership interests, or other non-public assets, appraisers and valuation experts will need to be retained soon to ensure the property is valued in time to complete your gifts by year end.

To discuss these tax savings opportunities, please call your estate tax attorney at Farella, Braun + Martel LLP or your other tax advisors.