The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Act”), was signed into law by President Obama on December 17, 2010. This Act provided a two year fix to the existing estate and gift tax problem.
The 2010 Act substantially increased the estate and gift tax exemption from $1 million to $5 million in 2011 increasing to $5.12 million in 2012. Furthermore, the 2010 Tax Relief Act reunified the estate and gift tax rates to a maximum of 35% during 2011 and 2012.
Unfortunately, the 2010 Tax Relief Act is scheduled to expire on December 31, 2012, unless Congress proactively extends the law before the end of the year. Assuming it will expire, as of January 1, 2013, the estate and gift tax exemption will be reduced to $1 million dollars and the maximum tax rate will increase to 55%.
On top of all this, the many Bush era tax cuts are also set to expire on December 31, 2012, which among other things will raise capital gains tax rate back up to 20% and raise the top two income tax rates to 36% and 39.6% respectively. Additionally, there will be a new 3.8% health care surtax, created under the 2010 Health Care Reconciliation Act, which takes effect on January 1, 2013.
Based upon these pending significant changes to the estate and gift tax laws and the expiration of the Bush era tax cuts, for some families it may be a perfect time to consider making considerable gifts to your loved, utilizing the existing tax laws to help reduce your current and or future gift and estate tax liabilities.
Assuming Congress does not extend the existing gift and estate tax exemptions (currently at $5.12 million), a single person can give up to $5.12 million, a couple $10.24 million, to his or her family without incurring any estate or gift tax on the transfer. A wealthy individual could also give more than these exemption amounts and pay a potentially lower 35% tax rate during 2012, rather than wait until 2013 and beyond. These gifts can be made directly to loved ones or through an irrevocable trusts where you may put instructions that will be beneficial to your loved ones over his or her lifetime.
Prior to making any substantial gift, I would recommend first talking about it with a qualified CPA and estate planning attorney. There are many things you should consider when making any type of lifetime gift to a loved one, including but not limited to the following:
- Can you afford the gift, as it generally cannot be recovered once given;
- Congress could extend the current law after the gift is made or enact a new law with similar exemptions in the future;
- Your beneficiaries will receive your cost basis in the gifted asset, rather than receiving a step-up basis (fair market value basis) if they were to receive the gift at your death.
We know changes are coming. After talking with your tax and estate professionals, you may find that this is the perfect season for giving.
If you have any questions regarding family based estate planning or any other legal issues, please do not hesitate to call the attorneys at Rowley, Chapman, Barney & Buntrock, Ltd. (480) 833-1113. Kenneth C. Barney is a partner with the law firm of Rowley Chapman Barney & Buntrock, Ltd..