The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law on December 17, 2011, creates an unprecedented opportunity for wealthy individuals to make tax-motivated gifts -- but only in 2011 and 2012. Individuals may give up to $5 million to loved ones (married couples may give up to $10 million) without having to pay gift tax. Prior to 2011, the most that could be given was $1 million ($2 million for married couples). While the law permitting gifts at this level may be extended beyond 2012, as things stand now the limit will revert back to $1 million in 2013.
The lifetime tax-free amount for estate and generation-skipping (GST) purposes grew steadily from near $1 million in 2001 to $3.5 million in 2009. During that same span, however, the lifetime tax-free amount for gift taxes was stuck at $1 million.
Because Congress failed to act in 2009 to extend the estate tax, Americans experienced a year of uncertainty in 2010. In theory, there was no estate or GST tax in 2010, but there was the threat of retroactive imposition of the tax. There was no uncertainty about the gift tax in 2010 -- the tax-free limit stayed at $1 million.
The 2010 tax law reinstated the estate and GST tax for two years and set the lifetime tax-free amounts at $5 million. This was unexpected, but at least had been discussed as a possibility. What was completely unexpected was that the gift tax tax-free amount also would be bumped to $5 million. The gift, estate and GST tax-free amounts have not been "unified" this century.
The 2010 tax law also set the rate for the estate, gift and GST tax for 2011 and 2012 at 35%. Rates have not been that low since the implementation of the current estate and gift tax scheme in 1981. In 2001, taxes were based on a sliding rate schedule which topped out at 55%. The rate was gradually reduced to 45% in 2007 - 2009. If Congress does nothing to change the law, the maximum rate will jump back to 55% in 2013.
Unless Congress changes the law, in 2013 the gift tax, estate tax and GST tax-free amounts will fall from these unprecedented levels to $1 million (or approximately $1,100,000 for the GST). No one knows if Congress will extend the $5 million tax-free amount. Many observers think it will be difficult politically for Congress to reduce the tax-free amount, so they speculate that we will never see tax-free amounts of less than $5 million. However, most of these same observers were wrong when they predicted that Congress would act in 2009 to prevent a one-year repeal of the estate tax.
Since the lower tax-free amounts and the higher rates may return in 2013, the wisest course for persons who can afford it is to make gifts of up to the tax-free amount in 2011 or 2012. The advantages include:
Possible concerns are:
The complexity of the new law and the dollars involved -- both the dollar amount of the gifts and the dollar amount of the taxes at stake -- mean that donors should consult with qualified estate planning counsel before acting. For more information, contact Glenn Karisch at The Karisch Law Firm, PLLC.