How can gifting help you avoid estate taxes?
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How can gifting help you avoid estate taxes?

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Authorization and Jobs Creation Act of 2010, known as the “2010 Act.”  The 2010 Act increased and extended the federal estate and GST tax exemptions for two years, 2011 and 2012, and for the first time increased the federal gift tax exemption to $5,000,000 per person.  The gift estate tax exemptions were indexed for inflation so that, in 2012, the exemption is $5,120,000 per person.

  • Prior to the year 2010 the gift tax exemption was stuck at $1,000,000 while the estate tax exemption was increasing. This was designed to prevent folks from making large lifetime gifts without paying gift tax. However, the government has given the taxpayers a gift by increasing the gift tax exemption to currently $5,120,000 per person. This means that each taxpayer can gift up to $5,120,000 worth away without paying any gift tax. However, this exemption is scheduled to be eliminated effective January 1, 2013.  It is very important to meet with your estate planning attorney and explore the benefits and potential tax traps associated with taking advantage of this gift giving bonanza before it expires.
  • For folks with assets well over the $2,000,0000 range you may want to consider irrevocable credit shelter trusts. In order to make a completed gift that will remove the asset from your gross estate upon your demise the giver must not retain any ability to enjoy or control the assets given away. In the event such control or beneficial ownership is retained that at the death of the giver the assets will be pulled back into the estate of that person and subject to estate taxes.  This is the rule that generally makes people have second thoughts about gifting as many folks are always concerned about making sure they have enough assets to live on the rest of their lives. The solution is these irrevocable credit shelter trusts.  
  • Joint Bank or Investment Accounts in General for Single People: These accounts will avoid the costs associated with the probate process and pass directly to the surviving joint owner.  There is no gift tax due upon the establishment of a joint account but the moment the non-contributing joint owner withdraws all the money a completed gift takes place and may result in a gift tax liability if the amount gifted exceeds the allowable $13,000 limit per year per person.  This is known as the present interest exclusion as is in addition to the gift tax exemptions mentioned above.  This is the amount that you may give away per person per year without triggering a gift tax liability. In addition, if the amount is over this limit then a gift tax return must be filed. A complete discussion of the gift tax rules is beyond the scope of this article.
Prepared by:
Todd E, Lutsky, Esq. LLM
Cushing & Dolan, P.C.
Attorneys At Law
Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors, Inc. Armstrong Advisory Group, Cushing & Dolan, WRKO and The Securities America Companies are unaffiliated.  Representatives of Securities America Inc. do not provide legal or tax advice.  The scenarios provided are for illustrative purposes only and not intended to represent client experiences of Armstrong Advisory Group or the Securities America companies.  Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state. November 2012