Press Room: Tax Release

March 07, 2012

Gift Planning for 2012: What You Need to Know

As has been reported in the press and tax resources for months, 2012 presents a unique opportunity for individuals to accomplish significant transfer tax planning. The reasons for this include:

  • The individual gift, estate and generation-skipping tax (GST) exemptions are $5.12 million* (for gift tax purposes, $10.24 million in aggregate for a married couple), and are all scheduled to decrease to $1 million on January 1, 2013.
  • The top gift, estate and GST tax rate is 35%, scheduled to increase to 55% on January 1, 2013.
  • The March 2012 AFRs (interest rates applicable to inter-family loans and sales) are at an all time low: 0.19% short term; 1.08% midterm and 2.65% long term.
  • Asset values, while somewhat recovered from 2008-2009 levels, are still considered by many to be low relative to expectations for many asset classes.
  • Valuation discounts, which have been the subject of numerous legislative proposals that would limit their availability, can still be used to leverage transfers under the current exemptions.

The overall effect is that gifts or other transfers made in 2012 in the incremental amount of $4.12 million ($8.24 million for married couples) can be made completely tax free; whereas, the same transfer made in 2013 will incur an immediate tax of $2.266 million ($4.532 million for married couples). Through other planning techniques the transfer of value can be increased to result in greater savings, in addition to the removal of all future appreciation from estate taxes.

If one chooses to make taxable gifts in 2012, for amounts transferred over the exemption amount, the effective rate of tax is 20 percentage points less than the 2013 rate. In addition, assuming the donor survives for at least three years, the gift tax paid will be removed from the future taxable estate resulting in an effective savings of as much as 39.25 percentage points, before time value considerations. By way of illustration, a $100,000 gift in excess of exemptions at today’s rates results in gift tax of $35,000 and a total outlay of $135,000. One would have to provide for a pre-tax bequest in one’s estate of $222,222 to transfer the same $100,000 to an heir at the 55% estate tax rate that is scheduled to return in 2013.

Predicting the course of future tax legislation is impossible, but the unfavorable law changes in 2013 noted above will occur automatically unless Congress acts. No matter what happens legislatively, it is unlikely that the tax laws and economic factors noted above will in any short period of time, if ever, be significantly more favorable than they are right now. This is the time to act if one is inclined to reduce transfer taxes. Planning of this nature may be very simple (e.g., making outright gifts directly or in trust) or could involve more complex planning and structures that take time to implement. Thoughtful planning requires time, and 2013 will be here soon!
For more information please contact your WTAS advisor.

*The $5 million exemption amount is indexed for inflation in 2012 allowing for an additional $120,000.