Timing is everything
Without congressional action, on Jan. 1, 2013, the lifetime gift and estate tax exemptions will fall to $1 million. In addition, the top gift and estate tax rates will increase from 35% to 55%.
Why would you want to give away $5.12 million? If you're a business owner or someone with significant wealth, making gifts in 2012 allows you to 1) transfer business interests or other assets while you're still alive and can see your heirs enjoy them, and 2) reduce the size of your estate, thus potentially minimizing eventual estate taxes.
Future appreciation on gifted assets won't be included in your taxable estate, so you can leverage your exemption by transferring assets you expect to appreciate significantly. Gifting can be even more advantageous if your spouse also uses his or her exemption now — for a tax-free maximum amount per couple of $10.24 million.
This limited-time exemption increase is available even if you used up your exemption when it was $1 million. In this case, you can give away an additional $4.12 million gift-tax-free this year (less any taxable gifts you made in 2011).
Business owners can transfer even more tax-free if their gifts of business interests qualify for minority-interest and lack-of-control discounts. A professional valuator can help you determine your business's current market value and any applicable discounts. Be sure to include your valuator's report with your gift tax return.
Big picture
Before making gifts, look at your overall financial picture. It's important to make sure you'll retain sufficient assets after gifting so that you can maintain your own financial security and live your desired lifestyle. •
Retaining control while transferring wealth
If you aren't ready to fully relinquish control of your assets but want to take advantage of the current gift tax exemption, talk to your financial or estate planning advisor about:
GRATs. A grantor-retained annuity trust enables you to transfer wealth to your children while retaining some control over the assets and enjoying an income stream throughout the trust's term. You (the grantor) must, however, survive the term, or the trust assets will be included in your taxable estate.
FLPs. A family limited partnership can help you transfer business interests or other assets to your children, grandchildren and others. They receive limited partnership interests in the FLP, while you retain a general partnership interest — and control. FLPs are frequent IRS targets, so be sure to establish yours for bona fide, nontax business purposes and to adhere to other applicable rules.
Other articles in the April 2012 Edition of Business Matters: