This year, many of us will be focusing on two things - the shrinking federal estate and gift tax “coupon” and the radical jump in transfer tax rates. The “coupon” is the amount that the Internal Revenue Code allows you to give away without having to pay gift taxes during your lifetime or estate taxes after you are gone. “Transfer taxes” include gift taxes, estate taxes and taxes on generation-skipping transfers. A generation-skipping transfer is a transfer by or gift or at death to someone who is two or more generations younger than the transferor.
The Code grants each one of us a $5.12 million coupon for gifts made, or people who die, in 2012. In other words, the first $5.12 million given away this year can pass tax free. As of January 1, 2013, however, the Code says that the coupon shrinks to $1 million. At the same time, the federal transfer tax rate goes from 35% to 55%. Clearly, we are scheduled for a huge tax increase. The only thing that will avert it is an act of Congress by the end of the year.
If you have an estate worth more than $1 million and you are not fond of paying taxes, you should consider some gifting strategies for 2012 - preferably strategies that will put you in no worse position whether the scheduled tax increase kicks in or not. Here are some ideas.
Name a charity as beneficiary of your IRA. The bad thing about traditional IRAs is that if you die owning them, your beneficiaries may have to pay both income and estate taxes on anything they receive from your accounts. To avoid this double taxation, you can name one or more charities to receive some or all of your retirement plan benefits, and that way you can save some taxes and send money where you think it will help the most.
Make annual exclusion gifts. The Code allows each of us to make tax-free gifts of up to $13,000 worth of assets, per transferee, per year. Thus, you can give each of your children, grandchildren, or other beneficiaries $13,000 worth of assets each and every year without even having to let the IRS know about those gifts. It is not hard to imagine how a coordinated gifting program could reduce or eliminate estate taxes for even fairly substantial estates. Every tax-free gift reduces the amount that will be subject to estate tax later on.
Make qualified transfers. Another form of tax-free gift is the “qualified transfer.” This is where you pay school tuition or medical expenses on behalf of a child, grandchild or other loved one. As long as you pay the tuition directly to the school, or pay the medical bill directly to the provider, these gifts are completely ignored for gift tax purposes – and you can make them on top of your annual exclusion gifts.
This article just scratches the surface of planning possibilities for 2012, so you should talk with your trusted advisors soon if you think it makes sense to give away some of your wealth during your lifetime.
For more information about Scott and his law firm, Est8Planning Counsel LLLC, visit www.est8planning.com.