by WILLIAM B. HOWELL
There has been much conversation about the “fiscal cliff” that is coming at the end of the year. But relatively little has been said about the opportunities that will no longer be with us after the end of December.
For example, during 2012 each of us has the ability to gift to anyone (or any combination of “any ones”) up to $5.12 million dollars tax-free. That means no gift tax to the giver and no income tax to the recipient, and the assets gifted will not be in the estate of the giver at death to be taxed. But on January 1, 2013, the gift tax limit will be back to a $1 million dollar lifetime exemption. That is unless Congress acts in the meantime. Given the track record of recent years, that would truly be a year-end miracle.
When the reduction in gift tax exemption amount is coupled with the reduction in the death tax exemption, moving the latter back to $1 million also, this is a time for unmatched planning opportunity. For anyone having a total estate value above $1 million, the next few days and weeks are an ideal time to bring down the size of their estate with some calculated gifting. Not only is the death tax exemption scheduled to go from $5.12 million back to $1 million, the top death tax rate is set to go up to 55%—so avoiding that outcome with some good planning can be of great benefit.
Some people are surprised to learn that their death taxable estate consist of not only their home and other real property, their savings, investments and bank accounts, but also life insurance proceeds if the policy owned by the decedent are included. Retirement funds like IRAs and 401ks are also a part of one’s taxable estate. When all of these are added together, many of us have a potentially taxable estate, even though we do not consider ourselves as being “rich,” whatever that means.
Some families have had a father or mother pass away in 2012 or prior, leaving a surviving spouse with all the assets. If the assets total above $1 million dollars, then prior to the end of this year is a very good time to gift away enough to keep the estate of the surviving spouse below the taxable amount. Gifting does not have to be done directly to the child or children, especially if you are concerned about their losing the gifted asset in a divorce, bankruptcy, lawsuit or just to poor judgment. Instead gifts can be put into a Gifting Trust that provides protection to the assets from those dangers. Also, the Gifting Trust can be structured so that the surviving spouse continues to receive the income produced by the gifted assets.
And then there is the issue of your retirement funds. A surviving spouse can inherit an IRA and take only the required minimum distributions. But if the retirement account passes to a child, they generally have to take it all out and pay any income taxes due immediately. On the other hand, a child can be allowed to take small taxable distributions over their lifetime if proper arrangements are made ahead of time (before the IRA owner passes away). This opportunity is not expiring at the end of the year, but planning still needs to be done before something happens—and who knows when that will be?
There are opportunities for all of us. Don’t let this unique time pass without at least consulting a knowledgeable estate planning attorney. That will sure help keep down regrets later which could result from not doing anything. Happy New Year!