Estate and Income Tax Planning – Gift Tax Exclusions – Expiring December 31, 2012

One of the most common tools used in estate planning – and one that everyone should at least give careful consideration to – is a program of making gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth. While Congress made estate planning at least somewhat more certain under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). For decedents dying after December 31, 2010 and before January 1, 2012, a revived estate tax with a $5 million exclusion (plus inflation adjustments after 2010) and top 35 percent tax rate applies. The 2010 Tax Relief Act also reunified the gift and estate tax, which was decoupled previously. The reunification applied to gifts made after December 31, 2010.

It is important to know, that when Congress reunified the gift and estate tax under the 2010 Tax Relief Act, it also added an inflation adjustment to the lifetime exclusion amount. For 2012 the lifetime exclusion has been adjusted to $5.12 million; $10.24 million if gifts are “split” with a spouse). THIS EXCLUSION EXPIRES DECEMBER 31, 2012 AND AFTER THAT DATE ESTATES AND GIFTS ARE SUBJECT TO TAX IF THEY ARE IN EXCESS OF $1 MILLION ($2 MILLION IF THE GIFTS ARE SPLIT WITH A SPOUSE).

There is a great deal of flexibility in the types of property that can be transferred. Gifts that qualify for the exclusion can be made in money, property such as stocks or bonds, or even a life insurance policy. Use of various different types of trusts can increase the amount given through use of valuations and market discounts.

One important thing to remember when you make a gift is that the recipient takes your tax cost basis in the property given. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it.

If used properly, a program of gift-giving can benefit everyone involved. The fact that recent changes to federal estate and gift taxes are expiring at the end of 2012, unless Congress acts, makes it all the more important for you to consider how a gift giving plan can be advantageous now. We believe there will never be a better time to consider a lifetime gift. If you have any questions about the best way of using gifts as part of your overall financial plan, please call us.

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