Oct 28

Written by: David Keligian
10/28/2011 2:38 PM  RssIcon

The $5,120,000 per person gift tax exemption is supposed to last until December 31, 2012. Why use it now if you still have next year? Here are two good reasons.

The first is that given our country’s economic and fiscal situation, the Joint Select Committee on Deficit Reduction, also known as the “Supercommittee”, may reduce the gift tax exemption sooner than 2012. At least half the members of the committee are insisting on tax increases as part of the deficit reduction “solution”. (As one wag put it, where do all the “solutions” go after politicians get elected?)

The Obama administration has not only proposed tax increases in its jobs bill, but is also calling for a return of the estate and gift tax rates and exemptions to their 2009 levels. That means an estate tax exemption of $3,500,000 per person, but a gift tax exemption of only $1,000,000 per person. So it is possible a significant reduction in the current $5,120,000 gift tax exemption could occur sooner than the end of 2012.

This is important because advanced estate planning relies much more on using the gift tax exemption than the estate tax exemption. Using the gift tax exemption permits you to “leverage” (magnify) the value of assets that are transferred for every given dollar of available exemption, as well as shift future appreciation out of your estate. By contrast, the estate tax exemption is much less powerful—it is applied dollar for dollar against the value of assets owned at death, and much more difficult to “leverage”.

The second reason relates to the concept of “leverage”. Instead of changing the exemption amount, the Supercommittee may instead propose eliminating some of the advanced planning techniques which provide you with leverage. One possibility is reducing or eliminating valuation discounts for transfers of closely held business interests to family members. Such changes could cost taxpayers much more than simply reducing estate or gift tax exemptions. Since the Supercommittee is supposed to present legislation that can be voted upon by Congress prior to year end, waiting until 2012 might be very expensive.

In using your $5,120,000 exemption, timing can be everything. Given the potential savings available, careful consideration should be given to the best way to maximize the exemption and when it should be used.

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