As 2012 comes to a close, it is critical to remember that the higher federal estate, gift, and generation-skipping transfer tax exemption amounts, as well as the lower tax rates, in place for 2012 are only available until the end of the year, absent action by Congress. Individuals, therefore, may be left with a closing window of opportunity within which substantial lifetime gifts may be made before the exemption amounts and tax rates return to their former levels.
When President Obama signed the 2010 Tax Relief Act into law on December 17, 2010, the federal estate, gift and generation-skipping transfer (“GST”) tax exemption amounts were unified and increased to $5 million, adjusted for inflation, with a tax rate of 35% on transfers in excess of $5 million. This increase in exemption amounts created a variety of planning opportunities for taxpayers looking to mitigate their federal estate tax exposure. Unfortunately, the 2010 Act is scheduled to sunset on December 31, 2012, resulting in the exemption dropping to its pre-2001 level of $1 million and the rate increasing to 55%. Unless Congress takes further action, the opportunity to take advantage of the higher exemption amounts will evaporate at the end of 2012.
Assuming Congress does not act, during the remainder of 2012 individuals can transfer up to $5,120,000 and married couples can transfer up to $10,240,000 (reduced by prior gifts), during life or at death, without incurring gift, estate or GST tax. Donors who have already used their $1 million gift tax exemption under prior law now have an additional $4,120,000 ($10,240,000 for married couples) in exemption that can be applied to lifetime gifts. Such gifts not only benefit donees during the donor’s lifetime, but they also shift future appreciation of the transferred property out of the donor’s potentially taxable estate. Certain aspects of the 2010 Act may affect estate taxes payable if the exemption amounts available at the time of the Donor’s death are lower than the current amounts. If made to, or in trust for, grandchildren or more remote descendants, gifts and bequests up to $5,120,000 ($10,240,000 for married couples) will also be free of the separate GST tax. Donors who applied GST exemption to prior gifts can make use of the higher exemption amount, less what they have already used, either for additional gifts or for transfers at death.
The Act thus creates the opportunity for significant transfers of wealth between now and December 31, 2012, when – unless Congress passes additional legislation – the higher exemption amounts and lower tax rates will expire and pre-2001 levels will be reinstated. Clients who are interested in making sizeable gifts to their children or grandchildren (or to trusts for their benefit) may wish to do so before year-end, but should seek advice first to discuss the possible consequences in the event pre-2001 law is in fact reinstated in 2013.