It’s Not Too Late to Make Major Gifts

Joel W. Katz, CPA

Few people need to worry about federal estate tax or the federal gift tax in today’s environment. For deaths in 2011, everyone has a lifetime gift and estate tax exemption of $5 million, which means being able to leave or give away up to $5 million without owing any federal estate tax. Married couples can leave or give away up to $10 million. For 2012 deaths, the individual lifetime exemption amount is increasing to $5.12 million per person.

For people who think their estate might owe estate tax, one way to avoid or reduce the tax bill is to give away property during their lifetime. Even for those who aren’t concerned about estate taxes, gifts offer intangible benefits such as getting to see recipients enjoy the gifts.

In 2011 and 2012, any individual can make an unlimited number of $13,000 gifts of cash or other property completely tax-free. This is known as the annual exclusion and this rule is pretty straightforward. For example, if you give $20,000 to someone, $13,000 of the amount is exempt from gift tax, but the remaining $7,000 is charged against the lifetime amount. Couples can combine their annual exclusions, meaning that they can give away property worth $26,000 per year, per recipient using a technique known as gift-splitting. Even if only one spouse makes a gift, it can be considered to have been made by both spouses, if they both consent.

All gifts that are made to a spouse are tax-free, as long as he or she is a U.S. citizen.  If a spouse isn’t a citizen, the limit on tax-free gifts is $136,000 in 2011 and $139,000 in 2012.

To make the most of the annual exemption, bear in mind that it is based on a calendar year. If a year is missed, one can’t go back and claim that year’s exemption amount. Spreading a large gift over two or more years can have a better result. For example, if you give your child $20,000 on December 17 and do not or cannot gift-split with your spouse, $7,000 of the gift is charged against the lifetime amount and a Gift Tax Return will need to be filed by April 15 of the following year. But if you give your daughter $10,000 in December and wait to hand over the other $10,000 until January 1, both gifts qualify for the annual exclusion.

The $5 million lifetime gift and estate tax exemption came about as a result of the tax changes that were passed in December 2010. The increase in the amount from the existing $3.5 million (along with the top estate tax rate of 35% - down from 45%) that was in effect in 2009 was a total surprise to the entire estate and gift planning professional community. Conventional wisdom, at the time, assumed that the rules that were in effect in 2009 would continue.

This has created an unprecedented opportunity for certain individuals to make major gifts to younger generations and remove from their estates future growth, which is the single most important benefit of gifting. This strategy has the effect of reducing an estate and the resulting estate tax.

Remember, however, that an ambitious program of gift-giving is not for everyone. Parting with assets can make people feel vulnerable or fearful that they will someday be without money that they need. If this is the case, major gifting may not be appropriate.  

One reason that planned gift-giving has gained in popularity is that people are living much longer. People that wait until they die to transfer wealth to their heirs may be transferring assets to family members that are nearing old age themselves. Providing financial help may be more useful when they are younger.

To ensure compliance with requirements imposed by the IRS, please note, any advice contained in this publication was not intended, or written, to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This publication is distributed with the understanding that the publisher and distributor are not providing legal, accounting or other professional advice and assume no liability whatsoever in conjunction with the information contained within this publication.