Act now to reduce
estate and gift taxes
Federal law leaves 18-month
window for tax-free transfer
ndividuals and married couples have
just a year and a half left to make plans
to transfer sizable gifts to family members
free of federal estate and gift taxes. Until
the end of 2012, individual estates of up
to $5 million and couples’ estates of up to
$10 million will be temporarily sheltered
from federal estate tax.
The Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of
2010 set the amount each person can give
during life or leave at death without transfer tax at $5 million per person, with a top
rate of 35 percent on amounts transferred
in excess of $5 million. The exemption will
return to $1 million in 2013 and the top
tax rate will most likely rise to 45 percent
or even 55 percent.
Taxpayers with large estates are wise to
take advantage of these exemptions in
2011 and ‘ 12. Under the law, substantially
more assets can be gifted to heirs free of
transfer tax, thus reducing the size of the
I
estate upon
death.
In addition, a
surviving spouse
can acquire all or
part of the $5 million lifetime estate and gift tax exemption of a
deceased spouse, even if there is
no will or trust. For example, assume John
dies in 2012 after he and Mary have each
transferred $2 million in assets to their
children. This means that their total joint
lifetime limit of $10 million in tax-free gifts
is reduced to $6 million.
Under previous law, at John’s death, his
remaining estate tax exemption, $3 mil-
lion, would be wasted unless he created
what is known as a credit shelter or family
trust before his death or through his es-
tate planning documents. Under the cur-
rent law, Mary has the ability to “inherit”
John’s unused $3 million of estate tax ex-
emption and will be able to reduce her es-
tate by $6 million if she
were to transfer those assets
before Dec. 31, 2012.
