$5+ Million Lifetime Gift Tax Exemption to Expire

From the Summer 2012 Edition of Values


The extension of the “Bush Tax Cuts” in late 2010 included an increase in the estate, gift, and generation-skipping transfer (GST) tax exemptions to $5,120,000 in 2012. These extensions expire on December 31, 2012, and are scheduled to return to $1,000,000 for the estate and gift tax exemptions and to $1,340,000 for the GST tax exemption. This, coupled with the increase in the tax rate for transfers in excess of these amounts from 35 to 55 percent, means that people hoping to take advantage of today’s historically low estate tax structure might need to act quickly. When you consider that current tax law is far more favorable to large estates than it has been for most of the past 50 years, and Washington’s recent stalemate when attempting to take any action in regards to the estate tax, it is reasonable to think that estate taxes may be set to rise. Additionally, with the federal budget deficit near the top of the political agenda, any action taken may well be to decrease the current tax advantageous opportunities.

Furthermore, this is the tax code and this is an election year. It is impossible to forecast with any certainty what the outcome will be. For instance, the term clawback has entered the estate-planning vernacular due to the expiration of these limits. The clawback could result in decisions made today producing unintended consequences depending upon what tax laws are applicable in the future. In the simplest example, if you use the $5+ million lifetime gift tax exemption in 2012 and die in 2013 when the gift and estate exemptions are scheduled to revert back to $1 million, there might be a clawback, retroactively pulling transfers made in 2012–intended to be tax-free–back into your taxable estate. Since the lifetime gift exclusion and the estate tax exclusions are “unified,” all lifetime gifts are applied to the estate tax exemption at the time of death.

Even with the uncertainty, those fortunate enough to be in need of ways to lower their estate should consider these sorts of opportunities prior to their scheduled expiration at year-end 2012. Given the complexity, it is crucial to start exploring this option now and to enlist the services of your tax or estate professional to ensure that you take full advantage of the current exemptions while considering any possible issues such as the potential clawback.