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As we approach the holidays and the end of the year, many people are
getting ready to make gifts to their loved ones to help reduce their estates. This is a good time to engage in gifting strategies -- especially due to the uncertainty over the estate and gift tax rules for next year.
For the past two years, Americans have enjoyed a relatively favorable
estate and gift tax regime. We will go back to a very unfavorable set of rules on January 13, 2013 unless Congress takes action and the President goes along.
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Current Rules:
For estates of individuals who die in 2012, the federal estate tax exemption is $5.12 million, and so is the lifetime federal gift tax exemption. The estate tax rate on the taxable value of an estate in excess of the exemption is a flat 35 percent, and so is the gift tax rate on lifetime gifts in excess of the exemption.
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The upcoming election will affect what eventually happens. But for now,
at least this much appears clear: You should still be able to rely on the annual gift tax exclusion to shelter lifetime transfers to family members and loved ones.
The annual gift tax exclusion hasn't been affected by other tax law
modifications over the last decade and that isn't expected to change. By systematically giving gifts that qualify for the exclusion, you can gradually reduce the size of your taxable estate over time -- no matter what Congress does or doesn't do.
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Here's the basic premise. Under the annual gift tax exclusion, you can give
gifts of cash or property to an unlimited number of recipients up to a specified amount without any gift tax consequences.
In other words, you can give a single recipient cash and/or property valued at
up to $13,000 in December and another $14,000 in January completely free of gift tax. If you give gifts within these limits, you don't even have to file a gift tax return.
The annual exclusion is doubled for joint gifts made by a married couple. For
instance, a couple could give a child $26,000 in December and another $28,000 in January with no gift tax due. However, you must file a gift tax return for these joint gifts.
If you're interested in year-end gifts, don't wait until the very last minute. If a
gift is made by check, it should be delivered and deposited by the recipient by December 31 to qualify for the 2012 annual exclusion. (However, the check can be paid by your bank in 2013. www.hrp.net
A Concerted Gift-Giving Program Separate and apart from the lifetime gift tax exemption, you can methodically reduce your taxable estate by bestowing sizeable gifts on as many family members as you desire. Let's say that you and your spouse, who own $2 million in assets, have three adult children and seven grandchildren. You plan to begin a concerted gift-giving program in 2014.
For simplicity, we'll assume that you give $28,000 to each one of your
offspring each year for the next five years. (This doesn't account for any future inflation adjustments in the gift tax exemption.) By the end of the five-year period, you will have reduced your joint estate by $1.4 million ($28,000 times 10 times 5), leaving you with $600,000 (plus your earnings in the interim).
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If you gift property such as stock that has appreciated in value, the
recipient must use your basis (usually, the original cost) to compute the taxable gain if he or she subsequently sells the property.
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This is not to say that you should abandon other more sophisticated
techniques, including family limited partnerships (FLPs) and intentionally defective grantor trusts (IDGTs), which are designed to maximize the benefits of the $5.12 million exemption in 2012.
Consult with your professional tax advisers before the end of the year to
determine the best course of action for your situation.
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