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Why 2012 Could Be the Year of Giving

By Jacob Levenson

Certain gift-giving exemptions are unusually generous this year — and are set to expire in 2013.

If you've been considering giving a sizable gift to your heirs, this may be the year to do it. The 2010 Tax Relief Act lets individuals make unusually large gifts tax–free, and dramatically decreases the tax rates on gifts that are not tax–exempt. Unless Congress acts to extend the law, those provisions will expire at the end of this year.

“We have until December 31, 2012 to take advantage of unprecedentedly high gift-giving exemptions,” says Steven Weisman, a law professor and author of the retirement planning guide Boomer or Bust. “Come January 2013, we may very well be facing a situation in which you no longer have these high exemptions.”

Families need to move quickly – but also plan carefully – to take full advantage of this window of opportunity. Start by familiarizing yourself with this year's unique opportunities. Then take a look at particular strategies that may help you realize your gift–giving goals.

A historic opportunity. In 2001, Congress sharply reduced taxes on gifts made during one's lifetime and on generation skipping transfers. The amount that is exempt from tax has increased with inflation to unprecedented highs, but both tax rates and exemptions are set to revert to their 2001 levels on December 31, 2012. So for many people, 2012 presents an estate planning opportunity of historic proportions. Here are some key points to consider:

  • Gifts up to a lifetime maximum of $5,120,000 carry no gift tax in 2012. Moreover, annual gifts of up to $13,000 per recipient per year do not count against the lifetime limit. On January 1, 2013, the lifetime maximum is set to fall to $1,000,000.
  • The gift tax rate in 2012 is 35 percent, but, unless Congress acts, it will jump to 55% on January 1, 2013.
  • Generation–skipping transfers of up to $5,120,000 are tax–exempt in 2012. The maximum tax rate for generation skipping transfers beyond that amount is 35%. Those numbers could change to $1,000,000 and 55% respectively

Gift giving strategies. There are a few tax–efficient strategies that could help you reach some of your estate planning goals this year. Here are three options you may want to discuss with your financial advisor.

  1. Set up a trust.
    Trusts are arguably the most powerful and flexible tools available to pass significant assets to your beneficiaries. Two to consider are:
    • Irrevocable Trusts:
      Any assets you place in an irrevocable trust can be invested, and any increase in their value will not be subject to estate tax upon your death. Assets gifted to an irrevocable trust are removed from your estate and become the property of the trust.
    • Grantor Retained Annuity Trust:
      This type of trust – also known as a GRAT – can be a tax-advantaged way to facilitate intergenerational transfers. You place assets in a GRAT and set a date upon which the trust will expire. An annuity is paid out every year until that date. When the trust does expire, your beneficiaries receive the remainder – including any growth – tax–free. If a GRAT seems appealing, you may want to act soon. Says Weisman: “There's been quite a lot of discussion about putting limitations on GRATs because they work so well.”
  2. Use the exemption of a deceased spouse.
    If your spouse passed away in 2010 or 2011, you can increase your own available gift and estate tax exemption to as much as $10,120,000 by adding any amount of your deceased spouse's unused exemption to your own exemption. This is often called a portability strategy. However, it can't be used to increase the amount of generation–skipping transfers that are exempt from tax.
  3. Sell assets to family.
    Interest rates and values are at record lows, making this an ideal time to sell large assets to family members. Say, for instance, that you bought your home for $100,000 and it is now worth $1,000,000. If you were to loan your children the money to buy the house from you, they would be able to sell it to a third party for $1,000,000 without having to pay tax on the $900,000 gain. You could use your lifetime gift exemption to forgive the loan at a later date.

This year's unique opportunities may very well convince you to make the large gift you've been pondering. But take your time, and consider all your options. “Never give away an asset that you may need,” cautions Weisman. “You want to be truly confident that you're ready to make this gift.” So be sure to talk with your financial advisor. He or she will help ensure that your gift-giving strategy is a good fit with your larger financial and estate-planning goals.

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