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Wealth Transfer in 2012 — Time to Act

Posted on Wed, May 02, 2012 @ 07:33 AM

Hans M. Zimmerby Hans M. Zimmer

If you have been thinking of updating your estate plans by reviewing strategies to transfer wealth to your children or grandchildren, 2012 may well be the time to act. We are currently in a legal environment regarding estate and gift taxes that has not been seen in the past 25 years and we may well never see it again after December 31, 2012.

Let’s review the estate tax history in Congress starting in 2000. In 2000, prior to George W. Bush becoming President, the amount exempt from the federal estate tax was $675,000 which meant that with some fairly basic estate planning, a married couple could leave $1,350,000 to their children free from the federal estate tax. Any amount over $675,000 for a single individual and $1,350,000 for a married couple was taxed at rates beginning at 35% and topping out at a mind-boggling 55% for estates above $5,000,000. The next 10 years presented quite a challenge for persons and their advisers who wanted to create the “best” strategy to transfer wealth either at death or during their lifetimes without triggering a substantial tax burden. From 2001-2010, thanks to the political wrangling in Congress, wealthy clients and their advisers were left with a situation where unless they could accurately predict the year of their death, the tax consequences were uncertain. The reason for this uncertainty was that the legislation signed by George Bush in 2001 was a 10-year law that would end December 31, 2010 unless the law as extended or modified prior to that time. If the law was not renewed, the amount exempt from the estate tax and the tax rates would return to their 2001 levels. The exempt amounts and the tax rate during that 10-year period were as follows:


2002                            $1,000,000                  Top tax rate – 50%

2003                            $1,000.000                  Top tax rate – 49%

2004                            $1,500,000                  Top tax rate – 48%

2005                            $1,500,000                  Top tax rate – 47%

2006                            $2,000,000                  Top tax rate – 46%

2007                            $2,000,000                  Top tax rate – 46%

2008                            $2,000,000                  Top tax rate – 45%

2009                            $3,500,000                  Top tax rate – 45%

2010                            unlimited**                 Top tax rate – 0**


During this same time, lifetime gifts had their own set of rules and as a general guideline, during a person’s life, the maximum amount that could be transferred without triggering gift taxes from 2001 through 2010 was $1,000,000. Any lifetime gifts above that amount were subject to gift tax starting at a base rate of 35% and increasing to a top rate identical to the estate tax. For practical purposes, this caused persons to not enter into substantial gifting programs during their lifetime because of the relatively low amount that could be transferred without triggering the tax.

At the end of 2010 (on December 29, 2011 to be exact), Congress somewhat unexpectedly acted to keep the estate tax laws from reverting to 2001 levels but also added several features that make 2012 an extremely crucial year both for advisers and their clients. For 2011, the amount exempt from the estate tax was increased to $5,000,000. For 2012, that amount is increased to $5,120,000. Even more significantly, until December 31, 2012, the amount exempt from gift tax is also $5,120,000. This increase in the gift tax exemption is to a great extent unprecedented as prior to 2011, the exemption from gift tax had never exceeded $1,000,000. The exempt amount at death had been higher than $1,000,000 for the last decade but not the amount exempt for lifetime gifts.

This law is set to end on December 31, 2012. Unless a new law is passed on or before that date, estate and gift tax exempt amounts and their associated tax rates return to 2001 levels. Making any predictions as to what the law will be on January 1, 2013 is not the purpose of this article other than to say that it would be foolish not to take a serious look at lifetime transfers during 2012. The family may decide that such a transfer is not part of the family plan but we should still look at it closely. We are currently in an environment where a married couple has the opportunity to transfer up to $10,000,000 ($5,000,000 for a single person) to the next generation or even to grandchildren and younger generations. Prior to this year, the opportunity to make lifetime gifts without tax consequences did not exceed $1,000,000 per person and that opportunity may well not exist past the end of this year. Congress has seen a number of proposed modifications to the estate and gift tax structure introduced ranging from a total elimination of the estate and gift tax to a return to limits only slightly higher than those in 2001. The Obama administration has its own proposal calling for a cap on lifetime transfers of $1,000,000 and an exemption at death of $3,500,000 starting January 1, 2013. Simple math tells me that the difference between my ability to make a $5,000,000 gift this year and under the Obama administration’s proposal is approximately $1,858,000.

Looking at the difference in the gift tax in terms of actual dollars presents a startling figure, doesn’t it? Time to act may be running short. Even if you ultimately decide not to make a gift during 2012, you owe it yourself and your family to at least review the situation closely.

Many other techniques besides outright gifts are available and could be incorporated into estate plans or into transfers of family assets or family businesses. Family partnerships, Grantor Retained Annuity Trusts (GRATs) and numerous other techniques are options in certain situations and should be reviewed along with outright gifts to make sure the right strategy is selected for both family and tax objectives.

Tags: Estate Planning, Taxation, Federal Estate Tax, Lifetime Gifts, Gift Tax, Gifting Programs, Family Partnerships, Grantor Retained Annuity Trusts, GRATs