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Gift Planning for the Second Half of 2012: A Tremendous Opportunity

June 19, 2012

Gift tax exemption high, tax rates low for rest of 2012.

The second half of 2012 ushers in a tremendous opportunity for individuals to accomplish significant gift and estate tax planning. I’ve put together this blog post to help you understand the major advantages presented by the government’s current set of gift tax rules, many of which may only remain available for a short time.

Currently, the laws as of January 1, 2012, provide up to $5.12 million ($10.24 million for married couples) of individual gift, estate and GST (Generation Skipping Tax) exemption and a tax rate of 35%. The exemption amount and rate are the most favorable in decades, but are slated to terminate on December 31, 2012.

On January 1, 2013, the exemption drops to $1 million per person ($2 million for married couples) and the tax rate increases to 55%. This gives couples the ability to transfer in excess of $10 million while avoiding estate taxes. As you can see, the window is rapidly closing to take advantage of these favorable 2012 laws providing significant transfer tax savings.

Here are some ways to take advantage of this window of opportunity:

Annual Exclusion for Present-interest Gifts

Each individual’s annual exclusion is $13,000 per recipient (for 2012). Married couples can double this amount to $26,000 per recipient through gift-splitting. This means that married couples can give up too $26,000 per recipient without impacting the $10.24 million ($5.12 million per individual) the couple can gift tax-free in 2012.

Outright Gifts

The simplest gift is giving cash to a donee outright, which can be done by writing a check or even by wire transfer. Gifting other assets such as real property or stocks can be completed with appropriate title transfers. These assets will transfer gift and estate tax free. Upon your death, the asset and its related income and capital appreciation will not be part of your estate.

GST Planning

Similar to gift tax planning, the 2012 increase in the GST exemption could be reversed in 2013. Therefore 2012 may be an appropriate time to make outright gifts to grandchildren or other remote descendants or to trusts exclusively for the benefit of those beneficiaries.

Multiple Ways to Gift

There are many ways to structure gifts. Some of the more advanced ways include techniques to leverage the potential estate and gift tax savings, such as sales to a grantor trust, use of a grantor retained annuity trust (“GRAT”) or a qualified personal residence trust (“QPRT”), utilizing an irrevocable life insurance trusts (“ILIT”), or valuation discounts, to name but a few methods. Use of any of these methods depends on the individual’s circumstances.

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