Two-Year Window Provides Ideal Time to Review Estate Plan
Late in 2010, Congress and President Obama passed legislation unifying and increasing estate and gift tax exemptions for the next two years and preventing much higher tax rates that were scheduled to start in 2011. For at least 2011 and 2012, there is a $5 million exemption for estate and gift taxes per individual. For married couples the exemption is $10 million. In years prior to 2010, the gift tax exemption was much lower, which made it difficult to make large gifts to loved ones or charities without paying large amounts of taxes.
The act also raised the generation-skipping transfer tax (GST) exemption to $5 million. On January 1, 2013, that exemption will go back to $1 million. The GST tax usually applies to gifts to grandchildren.
What does all this mean? That this is an excellent time to pare down your estate.
Frank has $7 million in assets. He has title to a vacation home valued at $3 million. In 2011 he decides to gift this home to his daughter.
The first $13,000 falls into the annual gift exclusion. The remaining 2,987,000 will apply to Frank’s lifetime gift tax exemption (which is $5 million). Clearly the gift falls within the lifetime gift exemption. In fact, Frank still has over $2 million left to give tax free or to apply to his estate tax exemption. If Frank gives no other large gifts, that means his estate will only be taxed for $2 million on his remaining $4 million in assets. Frank can also continue to gift $13,000 per year to his daughter that won’t count towards the estate tax exemption.
Giving the gift now is also beneficial to the child for other reasons. In addition to the exemptions, future appreciation of the gift will not count towards the estate and gift tax, which is why gifting property that is likely to appreciate in value is a good idea for estate tax purposes.
Review Your Estate Plan
If you haven’t revised your estate plan in the last few years, the estate and gift tax exemption is likely now much higher than when you last went to your attorney. It may be in your best interest to change certain things, especially if you have a living trust that tried to take advantage of the maximum possible earlier gift tax exemptions. Only an experienced estate planning attorney can give you advice on giving gifts for estate tax purposes.
Even if the new tax laws don’t apply to you, you can accomplish many things by having a will or trust in place. Speak with an estate planning attorney to review your situation and make sure you have provided as much as you can to your family, friends and important causes.