By: Jared Ripplinger, CPA, MBA, CFP®
For several years now there has been a great deal of uncertainty regarding the estate tax law, and what will happen in the next several years. The following is a brief synopsis of the variability in the estate tax law over the past few years, as well as some opportunities that exist during the remainder of 2012.
Gift Tax is assessed against lifetime transfers of assets in excess of the annual exclusion amount. The annual exclusion is currently $13,000 per donor per donee, and is available each year. The donee’s don’t have to be related to the donor in order for the gift to qualify for the annual exclusion, but the gifts do have to be a gift of a present interest in the property. A future interest in property does not qualify for the gift tax annual exclusion.
The Estate Tax is assessed by the federal government and some state governments, against the value of assets transferring at the death of an individual (the decedent).
Technically, there is no estate tax exemption, but there is a credit against estate tax, which effectively exempts a certain amount of assets transferring at death to the decedent’s heirs. For simplicity we will refer to this as the exemption equivalent.
Prior to 2001 the unified credit was large enough to equate to an exemption equivalent of $600,000 in 1997 to a projected estate/gift exemption equivalent of $1 Million in 2006. In May, 2001 EGGTRA was passed, accelerating the $1 Million exemption equivalent to be effective as of that date, and scheduling an increasing exemption equivalent amount over the next several years.
We saw the exemption equivalent for estate tax increase to $1.5 Million in 2004, then to $2 Million in 2006, followed by $3.5 Million in 2009. In 2010 the estate tax was repealed for most of the year, until congress passed a retroactive estate tax in December, 2010, combined with a $5 Million exemption equivalent. From 2004 through 2010 the gift tax exemption remained capped at $1 Million, but in 2011 the $5 Million exemption equivalent once again applied to both gift and estate taxes. That $5 Million exemption equivalent has been adjusted for inflation to $5,120,000 for 2012, which opens up some estate and gift planning opportunities.
Note that the unified credit (exemption equivalent) is scheduled to sunset (or expire) after 2012, which would result in the return of the $1 Million exemption for both gift and estate taxes, unless congress passes an extension of the law, or a new law to prevent the sunset of the 2001 estate tax law, with its subsequent modifications.
With that background, some opportunities that exist in 2012 include the following:
- Maximize the usage of annual exclusion gifting ($13,000 per donor per donee)
- Consider using some or all of the credit against gift taxes to reduce the size of the estate, or to utilize the credit while it is at its historically highest level.
- Beware of potential pitfalls in making gifts or bequests to grandchildren or other “skip persons”. There is another tax that may apply to generation-skipping gifts/bequests (not addressed in this blog post).
- Consult your CPA and your estate attorney to make sure your estate plans and documents are up to date and are structured to handle the unknown variables in the estate planning area.
As with anything estate planning related, each individual case can vary greatly from the next individual’s case, so make sure you meet with an estate planner who is familiar with all aspects of estate planning, and is up on the latest tax law and developments. Also keep in mind that a lot, if not most, of estate planning isn’t even directly tax related. In looking at estate tax reduction strategies, don’t let the tax purpose of a strategy undermine your ultimate estate plan, or non-tax purposes for estate planning.