Rare Window of Opportunity for Estate Planning is Closing

Change in Current Favorable Estate and Gift Tax Provisions is on the Horizon

By Joseph M. Mentrek

Vice President, Director of The Wealth Center at Meaden & Moore

Time may be running out to take advantage of some of the most favorable conditions that have ever existed for year-end estate and gift tax planning.

Now that the election is behind us, Congress is active again trying to resolve concerns over the “fiscal cliff” which include the expiration of a number of tax provisions as well as a series of automatic spending cuts meant to address the federal deficit. The current favorable gift tax provisions are among the provisions set to expire.

Under current tax law, the federal gift tax exemption is $5.12 million per person, and the tax rate on gifts beyond that amount is 35 percent. That means an individual can give away up to $5.12 million free of any gift tax, above and beyond the amount they can already gift under their $13,000 annual exclusion. For married couples, the exemption totals approximately $10.24 million.

That provision is scheduled to expire at the end of 2012, returning gift tax exemptions to $1 million in 2013 and a tax rate of 55 percent on gifts beyond $1 million. In the current economic and political environment, there is certainly reason to question whether Congress will continue the current rate and exemptions on gift tax into 2013.

That means individuals or couples who wish to take advantage of these historically favorable conditions are running out of time to do so. Gifting assets before year-end not only takes advantage of the current favorable tax treatment, but it also removes assets from the taxable estate, including any income and appreciation they might produce.

Gifting assets during life, rather than allowing them to transfer after death, offers some enticing tax benefits that individuals and couples should consider. There are numerous options for how to achieve such a benefit as part of an estate planning strategy.

An outright gift to children, grandchildren, or other beneficiaries is the most straightforward approach, but there are other approaches that may be considered. For example, an individual or couple might also elect to achieve the benefits associated with various trust instruments as well.

A gift in trust allows assets to be available to beneficiaries, but provides more protection from creditors and allows a third party to manage the assets if designated beneficiaries are not ready to manage the assets on their own. A “defective trust” or “grantor trust” goes even further because when the grantor retains certain powers over the trust property, the grantor incurs the income tax that would have ordinarily been payable by the trust, further enhancing the value of the transfer on behalf of the trust beneficiaries.

To enable tax-favored gifts that may take a couple right to the brink of their comfort level, a “spousal lifetime access trust” provides yet further protection, giving a spouse potential beneficiary status (and access to trust assets) as well.

There are numerous considerations for any individual or couple to explore when deciding if a gift before year-end is an appropriate step in their overall estate plan.

  • Is a gift affordable?
  • If so, which assets should be gifted?
  • What are the needs of various beneficiaries?
  • What are their abilities to manage gifts?
  • Is an appraisal necessary?

Given the various issues to explore and the impending change in gift tax law, now is the time for an estate plan check-up to determine the appropriate course of action. Call our office today at (216) 241-3272 to schedule an appointment with one of our experienced planners.