Year-End Gift Planning Strategies

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There is much uncertainty surrounding the estate-planning options that may be available in 2013.  Until the end of this year it’s possible to give away up to $5.12 million per person ($10.24 million per couple), without incurring a gift tax of up to 35%. Currently you can give up to $13,000 each year ($14,000 beginning in 2013) to as many recipients as you would like without even dipping into the $5.12 million exclusion amount. Spouses can double up on annual gifts to jointly give $26,000 to any person tax-free.  However, once you’ve succeeded these limits you do you start drawing down the $5.12 million.

The easiest way to use the annual exclusion is to give cash or other assets each year to each of as many individuals as you want. Another possibility is to put money in Section 529 education savings plans. Establishing these plans for relatives could relieve siblings or children of the need to save for college at a time when they are overwhelmed with current expenses.

You can set up a separate account for each family member whom you wish to benefit. Although your contributions to a 529 account are considered gifts, there are two unusual benefits: money in these accounts grows tax-free and can be withdrawn tax-free, provided it is used to pay for college, a graduate, vocational or another accredited school, or for related expenses.

Unless Congress acts before year-end, at the end of this year the current $5.12 million per-person exclusion from the federal estate and gift tax will automatically drop to $1 million and the tax on transfers above that amount will go up to 55%. There is a question as to whether gift or estate tax could be owed on the value of the previously gifted asset if the exemption returns to $1,000,000 in 2013 or future legislation results in a gift and estate tax exemption in an amount less than $5,000,000.  This is referred to as the potential for “claw back.”

In the simplest terms, an individual can make a large gift in 2012 without owing any gift tax, while the same gift in 2013 would result in a large gift tax liability. For example, for a single person or married couple with a taxable estate of $3 million, the scheduled estate tax changes could mean a $945,000 federal estate tax bill next year, versus zero under current law.  That’s why it’s important to think about your estate and gifting strategies over the next few months, and to talk with your attorney about a plan that you can execute as the tax-law changes get closer. Future uncertainty should weigh into any decision you make.

For additional assistance, please contact Steve Siesser at ssiesser@verizon.net.

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