Congress passed legislation in December 2010 which gives individuals a marvelous opportunity to gratuitously transfer wealth down to succeeding generations – but only for the next two years. In 2011 and 2012, the amount a person can transfer exempt from gift tax is $5,000,000 (up from the previous $1,000,000). If transferred properly, the exempt amount is in addition to the annual gift tax exclusion of $13,000 per person per year (indexed for inflation) and in addition to any payments for medical and educational expenses made directly to the qualified medical provider or educational institution.
If you have already used $1,000,000 of your previous exemption, you now have a window of opportunity for another $4,000,000. If your children or other intended beneficiaries are not capable of responsibly handling this much wealth or are still minors, your gift(s) need not be made outright. Instead, you can create an irrevocable trust to hold and manage this wealth and distribute it under specific terms and at such times as you may reasonably deem appropriate. Such a trust could work very well if funded with real estate, private family business interests or publicly traded securities. Although your estate will be required to report these gifts at your demise, the appreciation of the value of the assets after the gift transfer will not be taxed in your estate. At the time you set up such a trust, fair market value appraisals of the gifted assets may be necessary, especially for “hard to value” items such as real estate or family business interests.
Please don’t delay or wait until December 2012 if you wish to take advantage of this opportunity. This new law is scheduled to sunset January 1, 2013, at which time the lifetime gift exemption will return to $1,000,000. Even if Congress decides to extend this law, it could conceivably adjust this lifetime gift tax exemption to any amount between $1,000,000 and $5,000,000 or otherwise.
If you have specific questions on whether this opportunity is right for you, you may call any lawyer in our estate planning or tax group to schedule an appointment and we will be pleased to assist you.