For the rest of 2012, every American can transfer up to $5.12 million free of federal gift, estate and generation-skipping transfer tax—and estate planners are doing everything they can to motivate their clients to take advantage of this unprecedented opportunity.
To understand why this is such a big deal, we only have to look at recent history. From 1987 through 2001, the federal estate tax exemption—the amount of assets an individual can leave to others without having to pay estate taxes—increased from $600,000 to just $675,000. Then the Bush tax cuts went into effect, and the exemption increased from $1 million in 2002 to $3.5 million in 2009. When Congress failed to change the law, the estate tax was repealed in 2010, so there was no estate tax on estates of those who died that year.
At the end of 2010, just before the exemption was scheduled to revert to $1 million in 2011, Congress and the President reached an unexpected agreement. The result was a $5 million exemption for 2011 and 2012 that applied not just to estate taxes but also to lifetime gifts and the generation-skipping transfer tax. This is important because even under the original Bush tax cuts, when the highest estate tax exemption was $3.5 million, lifetime gifts were limited to $1 million. (The amount for 2012 was adjusted for inflation, resulting in the $5.12 million exemption.)
Consider the impact on estate planning for the rest of this year:
* Every American has a $5.12 million exemption in 2012, so a married couple can transfer up to $10.24 million out of their estates.
* You don’t have to die in 2012 to use this exemption. It can be used to make gifts and transfers now, while you are living.
* Transfers do not have to be made in cash or liquid assets. Illiquid assets, like a business, home or other real estate can be transferred to a trust. If you transfer your home, you can continue to live there and take the tax deductions. If you transfer your business, you can do it in such a way that you can keep control and receive the income. Future appreciation of these assets will not be subject to estate tax, and current depressed values will result in favorable valuations.
* The full $5.12 million exemption does not have to be used in order to benefit. Those with $1 million to $5 million in assets can save substantial amounts. And those with less than $1 million should consider some planning to prevent future tax liability.
* There are proven estate planning techniques available now (discounting, family limited partnerships, grantor trusts, etc.) that may soon be eliminated as Congress looks for more ways to raise revenues.
Coupled with the $5.12 million exemption and historic low interest rates, families can transfer significant assets at little or no tax.
Under current law, if Congress does not act by the end of this year, the exemption in 2013 will be just $1 million. No one knows what will happen with the law in the future, but it is likely that the gift tax exemption will fall significantly, probably to $1 million. This is true even if the estate tax exemption stays the same or falls to a lesser number, like $3.5 million.
Bottom line, after December 31, 2012 this gift from Congress will likely disappear and not return.