The $5 Million Gift Opportunity

By Donna Ryan, Tax Principal
July 2012

Wealthy taxpayers would do well to consider some important year-end planning.  2012 tax law in the estate and gift area presents an interesting opportunity to make gifts by transferring significant wealth to their heirs during lifetime free of current gift tax.    Lifetime gift limits are currently at $5,120,000 of value, scheduled to revert to $1,000,000 on January 1, 2013. 

Many taxpayers have had difficulty keeping track of the relevant rules in this area.  Most estates don’t pay any estate tax because the value of assets transferred must exceed a threshold before gift or estate tax is actually imposed.  Exemption amounts have changed multiple times over the last dozen years, with sometimes differing lifetime gifting vs. estate limits. 

Most taxpayers are aware that the federal estate and gift tax system can impose a tax on the value of assets transferred by gift during lifetime or upon death.  This system generally does not tax assets left to a U.S. citizen spouse or qualified charity, but can apply to all other transfers.    Experts sometimes refer to these taxes as somewhat “voluntary.”  Those taxpayers who are willing to make lifetime transfers of assets can often greatly reduce or even eliminate exposure to gift and estate tax.

The federal system is a cumulative one.  Taxpayers must report and track gifts in excess of a certain size annually.  The value of gifts made in excess of certain exemptions during lifetime may reduce remaining exemption at death.

Perhaps an example is in order.  Let’s say Taxpayer gives her child $1,000,000 this year and does so by transferring cash and securities valued at $1 million on the date of the gift from Taxpayer’s account to Child’s own investment account.  Under the present rules, the first $13,000 of this gift is entirely exempt from the gift and estate tax system by way of the so-called “annual exclusion” amount.  The remaining $987,000 is potentially taxable and reduces the amount Taxpayer can give in 2012 without paying any gift tax from $5,120,000 to $4,133,000 if we assume Taxpayer has not made any earlier taxable gifts.

Using the example above, Taxpayer could still give Child another $4,133,000 during 2012 without paying any gift tax.    However, if Taxpayer waits until January 2013 to make that same $4,133,000 additional gift, Taxpayer has already used almost the entire $1,000,000 limit scheduled for 2013.  That means Taxpayer will owe almost $2,100,000 of gift tax!

While the future of legislation in this area is uncertain, most experts agree that the potential to avoid or reduce future taxes by making large gifts this year is greater than any possible detriment.  In addition, there can be other benefits from making a large current gift.  Taxpayer removes the value of appreciation on assets given from the taxable estate.  There might be state estate or inheritance tax benefits to a lifetime gift since few states have a gift tax system.    Finally, there are many interesting tools and techniques to transfers assets at discounted values and to make gifts in trust if creditor issues or control of gifts is a concern. 

The generous allowance in place for 2012 is scheduled to expire on December 31st and may be far less favorable in future years.  Therefore, wealthy taxpayers who can afford to part with some assets during lifetime would be wise to consider aggressive gift programs by the end of this year. 

If you would like to discuss further, please call your BNN advisor or Donna Ryan.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.