Gift Planning Before The End Of 2012

by Womble Bond Dickinson

An unprecedented opportunity to make gifts and transfer wealth to family members is set to expire at the end of 2012. The 2010 Tax Act made substantial changes to the federal gift, estate, and generation-skipping transfer ("GST") tax law, including increasing the exemption amount to $5,000,000 and decreasing the rate of federal tax for transfers over that amount to 35%. However, unless Congress takes affirmative action, those changes will expire on December 31, 2012, causing the exemption amount in 2013 to be reduced to $1,000,000 and the tax rate to be raised to 55%.
The 2012 gift tax exemption amount (as indexed for inflation) is $5,120,000 (reduced by the amount of any prior lifetime taxable gifts). The gift tax exemption amount is in addition to the amounts of any gifts covered by the 2012 annual exclusion amount ($13,000 per person). For individuals desiring to make gifts outright to grandchildren or in trust for the ultimate benefit of grandchildren, the 2012 GST exemption amount is also $5,120,000. The exemption amounts can be doubled by a married couple who agrees to "split" all gifts made by either of them during the year.
It is impossible to predict whether congressional action on gift, estate and GST laws will occur before the end of 2012. Therefore, individuals and married couples who have considered making substantial gifts to their family members must plan now to complete those gifts by the end of 2012. The following are a few techniques that individuals should consider:
  • Outright Gifts. Gifts of cash, securities, or other property outright to family members are simple and effective. The person to whom the gift is made acquires the donor's basis in the property. Keep in mind that outright gifts may not be an effective use of an individual's GST exemption.
  • Gifts in Trust. An individual making substantial gifts often wishes to put some restrictions or limitations on the family members' access to the property. Trusts are flexible instruments that can be established to hold the property for the benefit of family members while providing restrictions on the use or expenditure of those assets. In addition, gifts in trust may allow the individual to use his or her GST exemption to transfer assets on a multi-generational basis with no transfer tax.
  • Spousal Trust. The Spousal Trust technique may be attractive to married couples who wish to use their gift or GST exemption amount but are concerned about losing the benefit of those gifted assets. This is a trust established by one spouse (the "donor-spouse") for the benefit of the other spouse (the "beneficiary-spouse") using the donor-spouse's gift exemption amount and possibly his or her GST exemption amount. The Trustee of the Spousal Trust can make distributions to the beneficiary-spouse during his or her lifetime. However, the best result is achieved when the married couple treats the Spousal Trust as a trust of last resort and spends from their other assets first.
Although any of these gifting techniques are an effective means of taking advantage of the 2012 gift tax and GST exemption amounts, it is imperative to take action now to complete the gift to family members by year end. We look forward to assisting you in taking advantage of this historic opportunity.
As always, please contact any of our attorneys in the Trusts & Estates Group to discuss year-end planning recommendations or questions that you may have about the Act.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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