Resource Articles Back to Article List

The Benefits of Making Gifts Before 2013

Currently, there is a window of opportunity to take advantage of a historically high exclusion amount for lifetime gifts. The amount you can currently transfer, either during life or at death, without incurring any gift, estate, or Generation-skipping Transfer (GST) tax, is $5.12 million. Unless Congress changes the law, this amount, which is referred to as the applicable exclusion amount, is scheduled to drop to only $1 million in 2013. In other words, if your net worth is more than $1 million, more of your assets are likely to be subject to estate taxes. Furthermore, although the top gift, estate, and GST tax rate (it is a unified tax system) is only 35% this year, it is scheduled to jump to 55% in 2013 (60% for certain estates valued over $10 million). As you can see, the opportunity to protect more of your assets against gift and estate tax is soon disappearing.

If you are not comfortable with giving the full $5.12 million (that amount may not be appropriate, depending on your net worth, as well as your lifestyle needs and desires), you can transfer lesser amounts and still benefit from future estate tax savings.

You also do not have to use any of your applicable exclusion amount for gifts if you make what are known as “annual exclusion gifts” to your children or other donees. The annual exclusion, which is adjusted for inflation each year, is $13,000 for 2012. The exclusion covers gifts on a per donee, per year basis. If you have three children, you can transfer a total of $39,000 to them every year with no federal gift taxes. If you are married with three children, you and your spouse can each gift this amount, for a total of $78,000. If those are the only gifts you make during the year and the gifts are cash or other readily determinable market value, you may not even need to file a federal gift tax return.

If you are married with separate property, gifts to donees made during a year can be treated as split between the husband and wife, even if the cash or gift property is actually given to a donee by only one of them.

If you are comfortable with giving away more than your $13,000 annual exclusion amount, the excess will be a taxable gift. But in all likelihood, your otherwise taxable gift will not result in a gift tax liability because it will be protected by your $5.12 million applicable exclusion amount. However, as you use this amount to protect against gift tax, it reduces (or eliminates) the amount available to protect against the federal estate tax at your death. That is because of the way the unified estate and gift tax systems add taxable gifts back to an individual’s estate at death. For property that is likely to appreciate, the sooner it is given away, the better for minimizing estate taxes. This is especially important in light of changes that are coming in just a few months that may cause a dramatic increase to your future estate taxes.

If you are charitably inclined, there are tax-advantaged ways to make a gift to a favorite charity while enjoying the income from that gift for your lifetime.

If you would like to discuss the role lifetime gifts can play in your overall estate plan or have any additional questions, please feel free to call us at your convenience.

IRS Circular 230 Disclosure – As required by IRS rules, although this written communication may address certain tax issues, the issuer of this document did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may the user/recipient of this document use this document’s written tax advice for that purpose. Nor may it be used to promote, market or recommend to another party any transaction or matter addressed herein.

AHP Download this Article