To understand why it is such a big deal, we only have to look at recent history. From 1987 through 2001, the federal estate tax exemption—the amount of assets an individual can leave to others without having to pay estate taxes—increased from $600,000 to just $675,000. Then the Bush tax cuts went into effect, and the exemption increased from $1 million in 2002 to $3.5 million in 2009. When Congress failed to change the law, the estate tax was repealed in 2010, so there was no estate tax on estates of those who died that year.
Then, at the end of 2010, just before the exemption was scheduled to revert to $1 million in 2011, Congress and the President reached an unexpected agreement. The result: a $5 million exemption for 2011 and 2012 only that applies not just to estate taxes but also to lifetime gifts and the generation-skipping transfer tax. This is important because even under the original Bush tax cuts, when the highest estate tax exemption was $3.5 million, lifetime gifts were limited to $1 million. (The amount for 2012 was adjusted for inflation, so that is how we came to have a $5.12 million exemption.)
Now, here’s what this means to you—and why it really is important for you to plan this year.
- This law was only for 2011 and 2012. If Congress does not act to change the current law by the end of this year, the gift, estate and generation-skipping tax exemptions in 2013 will be just $1 million.
- very American has a $5.12 million exemption in 2012, so a married couple can transfer up to $10.24 million out of their estates.
- You do not have to die in 2012 to use this exemption. You can use it to make gifts now, while you are living.
- You do not have to make the transfers in cash or liquid assets or completely give away your assets. You can transfer illiquid assets like your business, or your home or other real estate, to a trust. If you transfer your home, you can continue to live there and take the tax deductions. If you transfer your business, you can do it in a way so that you can keep control and receive the income. Future appreciation of these assets will not be subject to estate tax, and current depressed values will result in favorable valuations.
- You don’t have to use the full $5.12 million exemption to benefit. Those with $1 million to $5 million in assets can save substantial amounts. And those with less than $1 million should consider some planning to prevent future tax liability.
- There are proven estate planning techniques available now (discounting, family limited partnerships, grantor trusts, etc.) that may soon be eliminated as Congress looks for more ways to raise revenues. Coupled with the $5.12 million exemption and historic low interest rates, families can transfer significant assets at little or no tax.
No one knows what will happen with the law in the future, but it is likely that the gift taxexemption will fall significantly, probably to $1 million. This is true even if the estate taxexemption stays the same or falls to a lesser number, like $3.5 million.
Bottom line, this really is a unique estate planning opportunity to transfer substantial assets tax-free, and it will very likely be gone on January 1, 2013. You owe it to yourself and your family to meet with your estate planning attorney as soon as possible to find out how much youcan save by planning before the end of the year.