As 2012 draws nearer to a close, we should all keep in mind that the opportunity for maximum estate and tax planning may also be drawing to a close. What are we talking about? Let's look at the estate and gift tax changes which are scheduled to change at the end of 2012:
1) The $5,000,000 lifetime estate and gift tax exemption amount (actually $5,120,000) in 2012 is scheduled to revert to $1,000,000 in 2013.
2) The highest estate tax rate is 35% in 2012, which is scheduled to revert to 55% in 2013.
There's no guarantee the estate/gift tax exemption will be $1,000,000 in 2013, or that the highest rate of estate tax will be 55% in 2013. But these are what's scheduled, and absent an agreement from Congress, this is what we're getting,
So how we can take advantage of what is scheduled to occur?
Suggestion 1- Make Gifts This Year (2012)
Obviously we're talking about very wealthy people here. But if you have millions of dollars, you want to take advantage of every dime of that high $5,120,000 2012 exemption before it goes away. How do you do that? Recall that the estate tax exemption and the gift tax exemption basically operate in unison. So what the affluent person can do now is make a gift (let's say to a relative but it could be to anybody). So the affluent individual makes a gift to his daughter (that's probably who would inherit much of his estate anyway) in 2012 in the amount of $5,120,000. Now the wealthy individual has lowered his estate by $5,120,000 by giving that amount to the person to whom it was going to go to upon his death anyway. And because he did it in 2012, with a high estate/gift tax threshold, he was able to do it with no tax consequences. Imagine, on the other hand, if he didn't make the gift in 2012, but instead held on to the money and then passed away in 2013. Upon his death the $5,120,000 still goes to his daughter (under the Will), but under this scenario (with only $1,000,000 in the estate tax exemption in 2013), $4,120,000+ is subject to the estate tax (which is taxed at maximum of 55% in 2013= over $2,000,000 in estate tax). So by not making the gift to daughter in 2012, the wealthy individual's estate lost over $2,000,000 to the IRS.
Suggestion 2- If you Have Loans Outstanding to Family Members in 2012- Consider Forgiving Them (This Year)
Somewhat in line with Suggestion 1, if you are an affluent individual who has loans outstanding to you children, consider forgiving the loans (and making them gifts to your kids). Again, for the affluent, 2012 is potentially a very good year to make gifts to family members.
Suggestion 3- Put the Gifts For the Family Members into a Trust First
Again, it's a good year for gifts to individuals who would inherit from you anyway. Why put the gifts in a trust 1st? Well, for starters, if the individual's daughter has trouble with creditors (or if the individual's daughter gets divorced and we don't want the ex-husband getting any of the gift) those gifts (to the family members) are protected (unlike the outright gift). Also, this allows the wealthy individual to pay the tax on the growth (the interest/income component) instead of the daughter.
Other really interesting gift opportunities exist when gifting an interest in an LLC or partnership, where the gifts can actually be well above the $5,120,000 and still exempt (due to the discounting of interests in entities due to lack of marketability and for minority interests).
Last Question- Any Chance 2012 Gifts of $5,000,000+ Will Be Deemed Not Exempt in Later Years?
This is the question of the clawback. $5,120,000 is the exemption amount in 2012, but will the IRS retroactively deem that the $5,000,000 gift of 2012 was not entitled to the full exemption? There is no indication this will occur (although some practitioners do worry about it). For now, we say gift away, at least for the rest of 2012!!!