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To our Clients and Friends:
The IRS announced recently that the federal exemption from estate tax has been adjusted for inflation and will increase to $5,120,000 for individuals dying
in 2012. The federal exemption from gift tax will also increase to $5,120,000. For married couples, these exemptions are doubled, enabling the married couple to pass up to $10,240,000 to their heirs without triggering a federal estate or gift tax.
Many of our clients have already begun the process of making significant gifts to their children and grandchildren, anticipating that the current estate and gift tax exemptions will revert to $1,000,000 by 2013. I anticipate that many wealthy individuals will seek the most effective methods of transferring wealth to their children and grandchildren during this coming year, unless Congress acts soon to extend or modify these tax laws.
Some clients will choose to make gifts outright, which is the simplest form of giving a gift. Others will choose to form trusts as a way to provide for their loved ones, while at the same time protecting the gift recipient from the claims of creditors or in the event of a divorce. These trusts can also be structured to minimize estate taxes upon the death of the recipient (referred to as generation-skipping tax planning), and to ensure that gifts remain in the donor’s bloodline, rather than passing to an in-law, following the death of the gift recipient.
For those wishing to make more modest gifts, the federal annual exclusion from gift tax remains at $13,000 per person. Also, there is still no limit on the amount one may pay on behalf of another
for medical or education purposes.
When contemplating making a gift, the individual must consider how his or her financial independence will be affected. In other words, can you afford to give away significant assets during your lifetime? Also, it should be anticipated that the value of the gifted assets will appreciate between the date of the gift and the death of the donor. Historically, that would have been a reasonable assumption, but the economic turmoil of the past several years makes that assumption far less certain. Yet another factor to consider is how much unrealized capital gain is attributed to the gifted asset. If you give away an appreciated asset, the person receiving the asset will have a capital gain when the asset is sold, while a person who inherits an appreciated asset can avoid that same capital gain. The reason for this difference is that the recipient of a gift has a “carry over basis” equal to the donor’s basis, whereas a person who inherits property receives a “step up in basis” equal to the date of death value, regardless of the original cost basis of the person who has died.
Regardless of how the changes in the estate and gift tax laws affect you, this is an appropriate time for you to review the beneficiary designations on your life insurance policies and retirement accounts. Also, many bankers and investment advisors encourage their clients to list beneficiaries on no-retirement bank and brokerage accounts by using “payable on death” or “transfer on death” designations. These designations may be appropriate in certain situations but they can sometimes by contrary to a person’s planning objectives. For example, if you intend to create a trust for the benefit of an heir who is younger than a certain age, the “transfer on death” designation
supercedes the direction in your Will and a young, possibly immature person
may end up squandering his inheritance without the intended oversight of a Trustee.
Choices of guardians (if you have minor children) and agents to make health care or financial decisions in the event you become incapacitated should also be reviewed periodically.
Now you have some food for thought as you begin the new year. I encourage you to contact me if you wish to discuss any of the issues I have addressed in this letter, or to review your estate planning documents.
My best wishes to you for a New Year filled with laughter and good health.
Sincerely,
Joseph B. Rosenberg
In some
states this may be considered Attorney Advertising.
©Sahn Ward
Coschignano & Baker, PLLC
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