Estate planning in the future remains cloudy, but the big picture for the next two years is clear, thanks to the 2010 Tax Relief Act.
Strategy: Maximize the benefits of a lifetime gift-giving program. In other words, give generous gifts to family members. The bigger the gifts, the better.
The gifts currently reduce the size of your taxable estate. So your family will have less federal estate tax to pay no matter how the law evolves after 2012.
New law changes: First, the 2010 Tax Relief Act establishes an estate-tax exemption of $5 million for 2011 and 2012, the highest it’s ever been. (It will be indexed for inflation in 2012.) The new law also reunifies the estate and gift-tax regimes. As a result, the lifetime gift-tax exemption zooms to $5 million for the next two years. Other changes are coordinated with the generation skipping transfer tax (GSTT).
Of course, if you exhaust most or all of your lifetime gift exemption, you effectively reduce your estate tax shelter. But so what? In many cases, it makes sense to remove a substantial amount of assets from your estate while you can. Don’t delay because the law sunsets again after 2012.
You can combine the lifetime gift-tax exemption with the annual gift-tax exclusion for a lethal one-two punch. The annual gift-tax exclusion for 2011 is $13,000 per recipient ($26,000 for joint gifts made by a married couple).
Example: You’re married and you and your spouse jointly own assets valued at $6 million. You have three adult children and five grandchildren. If you give gifts to each one of the eight other family members in both 2011 and 2012, the annual gift-tax exclusion can shelter a total of $416,000 ($26,000 x 8 x 2). Say that you also give each of your three children $1 million covered by the lifetime gift-tax exemption.
Net effect: You’ve managed to reduce your estate by $4.16 million without paying a single penny of gift tax. Future earnings on those assets will be taxable to the respective family members. And you and your spouse each still have a $3.5 million estate-tax exemption ($5 million – $1.5 million used to shelter gifts) in your back pocket through 2012.
To qualify for these tax breaks, gifts must be “complete.” That means you generally have to give up control over the assets.
Tip: Who knows what will happen after 2012? Take advantage of the new law provisions while they remain on the books.