Tuesday, June 21, 2011

The 2011 & 2012 Gift Tax Exemption

The lifetime gift tax exemption has been increased from $1,000,000 to $5,000,000 but only for 2011 and 2012. Is it worth taking advantage of the new exemption amounts? Definitely.

Let me preface by admitting the obvious: those amounts are way beyond the level most of us can gift. Nonetheless, there are people who can, and it is those people who hire tax CPAs - such as yours truly.

Why the rush? Well, who knows what Congress will do? We do know that these exemptions are available for the better part of two more years. When coupled with other tax techniques that can leverage the exemption amount, such as family limited partnerships or retained interest trusts, the opportunity for substantial family wealth transfers with no or minimal transfer tax consequence exists.

There is an issue here that has bothered the tax community. The estate tax is calculated by summarizing the taxable estate and adding-back any lifetime taxable gift transfers. If the gift exemption returns to $1,000,000 in the future, how will one calculate the “lifetime taxable gift transfers?” Will it be the excess over $5,000,000, as it is now, or will it be the exemption level in the year of death (say that level returns to $1,000,000)? I have read no serious tax commentator who expects that whipsaw to occur.

It is however a sad indictment of the instability of our tax system that such a question is even raised.

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