Prior to 2010, the federal gift tax exemption had never been greater than $1,000,000. Then, under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the exemption was increased to $5,000,000 in 2011 and $5,120,000 in 2012. If you are married and elect to "split gifts", your total exemption is now $10,240,000.
However, this historically large exemption will come to an end when the 2010 Tax Act sunsets at the end of this year (unless it is extended by Congress). Therefore, unless Congress acts to extend the current provisions, lifetime exemptions will drop significantly to $1,000,000 and the top gift and estate tax rate will increase from 35% to 55%. Furthermore, the current administration's 2013 budget calls for a reduction in these exemptions and an increase in tax rates.
If you act before the end of this year, you will be able to make significant additional gifts up to the new $5,120,000 limit (reduced by any exemption used by you in 2012 and prior years) without incurring any federal gift tax. This could be particularly advantageous for anyone who has already used all or nearly all of the earlier $1,000,000 exemption. In certain cases, it may make sense to go further and make taxable gifts at the substantially reduced 35% gift tax rate.
Many clients are "generation-skipping" their large 2012 gifts to take advantage of the enhanced generation-skipping tax ("GST") exemption for 2012 (also $5,120,000 and scheduled to drop to $1,000,000 in 2013). However, if you plan to make generation-skipping gifts, you should confirm that the amount of any such gift is less than or equal to your remaining GST exemption. It is not at all unusual for a person's available GST exemption to be less than his or her gift tax exemption.
Additionally, if you are planning to give away assets other than direct gifts of cash or marketable securities (for example, gifts of real estate, closely-held business interests, or less than 100% of any asset), you should start the gifting process very soon. It is likely that appraisers and other valuation experts will become very busy as the end of the year draws near, and you should have a reliable valuation completed before you consummate any 2012 gift.
In all events, you should review any 2012 gifts (in excess of $13,000 per recipient, per year, annual exclusion gifts) with your financial and legal advisors before pulling the trigger on any proposed transaction and, if you haven't already, meet with your advisors to evaluate whether it makes sense to consider what may be an unusual and limited window for significant gift and generation-skipping tax planning opportunities.
