Gifting assets to family members or to charitable organizations has long been a way for estate owners to reduce the size of their estate for tax liability purposes while benefiting loved ones or beloved causes. Currently, the tax code allows for each individual to give $13,000 a year ($26,000 for married couples) to as many people or charities as they want without having to pay a “gift tax”. This “annual gift exclusion” is generally increased each year based on inflation, but there is also a maximum exemption that caps the total amount of gifts a person or couple can give throughout their lifetime.
Recent changes in the tax code pertaining to estate transfer have suddenly increased the appeal of gifting, at least for a short period of time. In fact, right now may be the best time to gift or transfer wealth that we will see in our lifetime. Previously, the maximum gift exemption was capped at $1 million, a level that owners of larger estates would hit fairly quickly. If they continued to gift assets, the amount of gifts that exceeded the cap would be included in their estate for tax purposes.
The Gift that Keeps People Giving
In 2011, Congress raised the exemption to align it with the exemption that applies to the total estate which is currently $5 million ($10 million for joint estates). As a result, estates as large as $5 million will be exempt from estate taxes and an additional $5 million of gifted assets will also be exempt which means that as much as $10 million of estate assets could be exempt from taxes. This dramatically increases the incentive to begin transferring wealth during your lifetime rather than waiting until after your death.
It is important to note that the higher exemption level does not affect the annual gift tax exclusion which currently stands at $13,000 per person. But is still provides an incentive to start gift earlier and to keep gifting. The other important note is that this increased exemption is only available through the end of 2012, so, depending on your situation, it may make sense to make more and larger gifts before the exemption is lowered again. While we have no way of knowing what action Congress will take after 2012, owners of larger estates may want to take advantage of the higher exemption while they can. This is a key estate planning strategy.
Expand the Use of Charitable Remainder Trusts
One way to accelerate your gifting is to increase the amount of assets transferred to charitable remainder trusts. A remainder trust is different than a living trust. This type of trust accepts larger asset transfers on behalf of a charity. The asset within the trust becomes the “remainder” which is left behind after the grantor dies. In the meantime, the grantor benefits from the income that the asset generates. When the grantor dies, the value of the asset is not included in the taxable estate so it is a true win-win for the grantor and the charity.
Seek Professional Guidance
As with any issue pertaining to taxes, decisions should not be made without the guidance of a tax professional. Tax laws related to federal estate tax exemptions are prone to constant change, and they apply differently depending on an individual’s specific situation.