End Of The Year Tax Planning – Making The Most Of The Gift & Estate Tax Exemptions

We are now nearly a year removed from the expansion and unification of the gift and estate tax credits, and now is the time to take advantage of this liberal tax exemption.  Currently, the exemption amount is $5 million for both gift and estate tax purposes.  This exemption is scheduled to sunset on December 31, 2012, after which it will revert to a much harsher $1 million exemption if no legislative action is taken.  The estate tax rate will also rise from 35% to 55% if no action is taken.

Before the end of 2012, a married couple may transfer assets with a value of up to $10 million (reduced by any previous taxable gifts) to their children or grandchildren and such transfers to the next generation are estate, gift, and generation skipping transfer tax-free.  This helps to relieve the next generation’s burden of paying significant estate taxes and ensuring that more assets are received by the family.

Of course, taking advantage of this opportunity does not require the transfer of a full $5 million (or $10 million) and this type of tax planning is not merely for those individuals with more than $5 million in assets.  Individuals or couples with more than $1 million may wish to take advantage of this opportunity before the adjustment at the end of 2012, as there is widespread expectation that Congress will act to reduce the 2012 exemption and allow the estate tax rates to increase in an effort to cut the burgeoning federal deficit.  Those who fall into this “estate gap,” i.e. those who have less than $5 million in current assets but are likely to die with more than the $1 million in their estate, may one day come to wish that they engaged in some estate tax planning when such a generous opportunity presented itself.  This is especially true given the fact that it is often not necessary to turn over control, income, or who is to receive the asset after the death of the transferor, until later in life, even if the gift is considered taxable by the IRS as of this year.

Taking advantage of the current gift and estate tax exemptions should continue to remain atop the agenda of tax-conscious individuals going into 2012.   Interested taxpayers should contact a knowledgeable tax attorney to discuss their options before the current exemption expires, along with valuable tax planning opportunities.