Year-End Gift Planning Opportunity

Written By:  J. Paul Fidler and David M. Lenz

Schneider, Smeltz, Ranney & LaFond P.L.L.

Cleveland, Ohio

As we enter the final couple of months of the year, the deadline is fast approaching on a once-in-a-lifetime opportunity for individuals to make large gifts to family with favorable transfer tax consequences.

As you have probably heard, in 2012, the federal gift tax exemption is $5.12 million, meaning you can give away up to $5.12 million in assets (beyond so-called “annual exclusion” gifts) during your lifetime without paying any gift tax.  For married couples, the gift tax exemption is double that figure – approximately $10.24 million.  The gift tax rate on amounts above $5.12 million is 35%.  The high-exemption, low-rate opportunity for large gifts is scheduled to expire at the end of 2012.

In 2013, the gift tax exemption is scheduled to return to $1 million, and the tax rate will be 55% on gift amounts above $1 million.  Congress could change the law before the end of the year (or early next year, retroactive to the beginning of 2013).  However, any legislative action will be after the November elections at the earliest, and it is impossible to predict how the “lame duck” Congress will act-particularly before we know the election results.

From a tax perspective, it is preferable to transfer property by gift rather than at death for three reasons:

(1)   The gift tax exemption is historically high and may never be this high again;

(2)   Income and appreciation on the assets given away are removed from your taxable estate; and

(3)   To the extent gift tax is paid, the payment reduces the size of your taxable estate.

Following are a few examples of how you can take advantage of the current gift tax exemption.  We reference gifts to children, but gifts to nieces, nephews, friends, or other beneficiaries would work the same way.

  • Outright Gift to Children:  This is the simplest way to make a transfer.  Note that your children will receive your income tax basis on the property given away (as opposed to a “step-up” in basis to fair market value, in the case of gifts made at death).
  • Gift in Trust for Children and/or Grandchildren:  Allows the property to be available for the benefit of your descendants, but provides greater creditor protection and allows a third party to manage the property for your descendants if they are not ready for that responsibility.
  • Gift to “Grantor Trust” for Children and Grandchildren:  This is the same as the previous option, but you retain powers over trust property that cause you to be treated as the owner of the Trust for income tax purposes.  You pay the income tax on any income earned by the trust.  These tax payments reduce the size of your estate for estate taxes but are not considered additional gifts for gifts tax purposes.
  • Gift to “Spousal Lifetime Access Trust”:  If you are at all concerned about whether you can afford to give away the property, this trust contains a safety valve, because your spouse is a potential beneficiary along with your descendants.
  • Gifts to Leverage Low Interest Rates:  There are several estate planning techniques where the amount of a gift is determined using IRS-published interest rates that are currently near historical lows at 1.2%.  If the assets given away outperform this rate of return, you can make significant transfers at a minimal or non-existent gift tax “cost.”

While there are a variety of great opportunities available for lifetime gifts, these opportunities are scheduled to disappear on December 31, 2012.  Please contact us right away if you are interested in learning more about any of these opportunities, so we can design the best plan for you and act on that plan before the end of the year.

For more information about Schneider, Smeltz, Ranney & LaFond P.L.L., please visit www.ssrl.com or the International Society of Primerus Law Firms.

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