Currently, the exemptions for federal gift tax, estate tax, and generation-skipping transfer (GST) tax are at historic highs, and the gift, estate, and GST tax rates are at historic lows. But, in 2013, the exemptions are scheduled to substantially decrease, and the tax rates are scheduled to substantially increase. This raises the question of whether 2012 might be a good time to make large gifts that take advantage of the current large exemptions while they are still available.
End of 2012 changes loom
The exemptions (there is one for gift and estate tax, and a separate one for GST tax) are currently $5.12 million in 2012, but are generally set to decrease to $1 million in 2013, and the top transfer tax rate is generally set to increase from 35% in 2012 to 55% in 2013. (In general, a married couple’s exemptions would decrease from $10.24 million in 2012 to $2 million in 2013.) Of course, no one knows what the future holds for these taxes, and there is a lot of speculation about what Congress might do. The exemptions could decrease, increase, or stay the same, and tax rates could increase, decrease, or stay the same.
When evaluating whether to make a large gift in 2012, the following should generally be considered: the size of your estate and the rate at which it can be expected to grow (or decrease), whether you can afford to make large gifts, what the future of the transfer taxes might be, and whether “claw back” would apply in future years.
Claw back refers to the possibility that the benefit of the gift using the $5.12 million exemption would be later recaptured if the exemption is only $1 million at the time of death. There is some split in opinion as to whether claw back applies to the estate tax.
Example(s): Assume the gift tax and estate tax change as currently scheduled in 2013 and claw back applies. Assume you make a taxable gift of $5 million in 2012 that is fully protected by your gift tax exemption and you have a taxable estate of $5 million when you die in 2013. Estate tax, after reduction by the unified credit but not the state death tax credit, is $4,795,000. The result is essentially the same as if you had not made the taxable gift in 2012 and your taxable estate is $10 million in 2013.
Assume the same facts as above, but with no claw back. Estate tax, after reduction by the unified credit but not the state death tax credit, would be $2,750,000. So, the federal estate tax is $2,045,000 lower if there is no claw back.
The bottom line
It may be useful to note that, under any future transfer tax scenario, a person who makes a large gift sheltered by the exemption now will generally be no worse off at death than if he or she had not made the gift. However, if the exemptions decrease and tax rates increase as currently scheduled and there is no claw back, transfer taxes may be saved by making the large gift now. Furthermore, if the property transferred by gift later increases in value, there may also be transfer tax savings by removing the appreciation from the transfer tax system.
An estate planning professional can help you evaluate the benefit of making a large gift in 2012 to take advantage of the current large exemptions.