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The Uncertain Future of the Estate and Gift Tax in 2012

Federal Gift and Estate Tax Exclusions Increase by $120,000 in 2012

As we head into a new year, the good news is that inflation adjustments kick in and the federal gift and estate tax exclusions are increased from $5,000,000 to $5,120,000.

But the Exclusions May be Repealed or Amended for 2013

The future of the gift and estate tax is uncertain and will likely be a campaign issue in the 2012 elections.   What happens in 2013 will likely be decided at the last minute by a lame duck Congress.

The proposals in Congress run the gamut from a total repeal and abolition of the gift, estate and generation skipping transfer taxes (proposed by Republican House members) to allowing the gift and estate tax credit shelter exclusions to fall back to $1,000,000 on January 1, 2013 with a 45% maximum rate.  In between, the Obama 2012 proposed budget calls for  a $3,500,000 credit shelter and a 45% maximum rate.

The Senate has proposed compromises in the middle ground, retaining the $5,000,000 credit shelter but adopting the higher 45% maximum rate.  The “Super Committee” considered scaling back the estate tax credit shelter to $3,500,000 as it was in 2009, scaling back the gift tax credit shelter to $1,000,000, and imposing a 45% rate.

None of these proposals attracted a consensus in 2011.

If You Have an Estate over $1 Million, Consider Taking Advantage of the $5 Million Gift Tax Exclusion Now

If you have an  estate over $1,000,000 in 2012, the question is whether you should  take advantage of the $5,000,000 gift tax exclusion which is currently available and which may not be available in 2013 and on into the future.  Certainly there are some circumstances where large gifts will make sense from a transfer tax and family succession planning standpoint.  If you own a  family farm or family business, now may be the time for you to transfer substantial portions of  family wealth to the younger generation without incurring a transfer tax.  Likewise, this may be a particularly good time to consider transferring your family vacation property or residence to the younger generation, particularly if there are no future plans to sell.

Be Aware, however, of Potential Future Capital Gains Taxes

A principal drawback to a plan to transfer a substantial portion of your family wealth to the younger generation from a tax planning perspective would be the potential future capital gains tax issues that might arise from the carryover basis which results from a lifetime gift.    By making a lifetime transfer, the potential gain on the property will be locked in and the possibility of obtaining a basis step up at death will be lost.  If Congress decides to retain the current $5,000,000 estate tax credit shelter exclusion, using the gift tax exclusion now might lead to unnecessary future estate taxes.

Substantial gifts may take some time to implement.  If you are interested in taking advantage of the currently available gift tax exclusion, it would be wise for you to begin planning now.