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2012 Gift Tax Exemption - Use It or Lose It (maybe)

Andrew Rassi

Posted: September 13th, 2012

Author: Andrew Rassi

Categories: Estate Planning, Business Succession

Certainty in Uncertain Times.

There is a lot of uncertainty on the political and economic fronts at the moment. Who will be elected this November? Will Europe right its economic ship, or will it start sinking and drag us down with it? Will Theo Epstein be able to bring the Cubs a World Series trophy in my lifetime? Among all these big picture questions is a relatively smaller question of whether Congress will be able to pass an extension on the estate and gift tax exemptions currently in place, or will we revert to the pre-Bush tax act levels? I’m not about to attempt to forecast what Congress may or may not do on this matter. I have certainly been wrong on that before.

Instead, let’s look at what is certain. Right now we have a lifetime gift exemption of $5.12 million for each individual from gift taxes. So, whatever happens after January 1, 2013, we know that large, tax free gifts can be made this year. Will such gifts be able to be made next year? Maybe and maybe not.Why take the risk?

Who should consider gifting this year?

Those persons with a taxable net worth as low as $5 million, especially those who are business owners whose businesses are growing and they believe will continue to grow should consider significant gifts to the next generation this year. That doesn’t mean that the sole owner of a company needs to give a controlling share to child or give any asset to a child free and clear without any strings attached. The gift can be made to a trust that has provisions in place to protect both the asset being transferred and the beneficiary of the trust from the potential corrupting effects of large one-time gifts.

Certainly, those persons who have a net worth exceeding $10 million should consider gifting a large chunk of their remaining lifetime tax exemption amount this year before Congress weighs in and either lets the current tax act lapse or enacts a new tax act that is not as beneficial as the current taxing regime. Although I am not in the handicapping business, I would think it would be a fairly safe bet that taxes of all kinds, including estate and gift taxes, will not be going down in 2013.

Caveats.

Although large gifts up to $5.12 million will be exempt under the lifetime gift tax exemption currently in place, gifts of appreciated property or business interests will not only transfer the asset, but also the built up capital gains associated with the asset. Unlike testamentary gifts, which receive a step-up in basis, gifts during a person’s life transfers the donor’s basis in that asset to the recipient of the gift. For example, if the owner of a family cottage bought the cottage for $100,000 in 1980 and transfers the cottage to their son today and the son seeks to sell it at its current value of $1 million, the son will need to pay capital gains taxes on the $900,000 increase in value.

Further, if you are dealing with real estate in Michigan, gifts of more than 50% of the real estate’s value (excluding the creations of joint tenancies with rights of survivorship) will allow local assessors to “uncap the property” and increase the real estate taxes associated with the property. (For more information on uncapping issues, see previous article, Changes in Law Present Planning Opportunities.)

Don’t wait until it’s too late.

Although it may seem like a simple thing to make a gift prior to the end of 2012, if the gift involves something other than cash or marketable securities, there are a few more steps that should be undertaken to make sure the gift is effective and to create any trusts necessary to receive the gift. For example, if it is a business interest that is being gifted, the donor will need to get a valuation of the interest being transferred that would be satisfactory to the IRS, which may take anywhere from 3 weeks to 6 weeks for a business valuation expert to prepare. Likewise, if there is any real estate involved, it will need to be appraised by a competent and licensed appraiser familiar with the type of property being transferred. If you wait until after Thanksgiving to pull the trigger on a gift, it may be too late.

If you have any questions regarding potential gifting or business succession planning, please contact Andrew L. Rassi