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Gift Giving Strategies for 2011 and 2012

Planning opportunities and considerations for high net worth clients.

Helen Modly, 10/13/2011

Tax legislation passed in December 2010 included an unexpected estate planning bonus--a lifetime gift, estate, and GST tax exemption of $5,000,000 per person. Unfortunately this increased exemption applies only for 2011 and 2012, creating a short window of opportunity for high net worth clients to reduce their estates through lifetime gifts.

The changes in the lifetime gift tax exemption didn't change the basic gifting rules, nor did they change the rules relating to the annual gifts that can be made totally free of tax.

The annual gift tax exclusion is still in effect:

  • An individual can make a gift to another individual (other than a spouse) of up to $13,000 during 2011 (this amount may be adjusted in 2012 for COLA increase)
  • Gifts to spouses are unlimited (except for non-U.S. citizen spouses, where the limit is $134,000 for 2011)
  • A married couple can make joint gifts of up to $26,000 but must file a gift tax return if the gift is made from one spouse's assets and the other spouse consents to apply his/her exemption to the gift (this is called "gift splitting")
  • Gifts under the annual exclusion threshold are free from any federal gift tax consequences
  • Direct payments to colleges or hospitals for the benefit of another person do not count against the annual exclusion

The lifetime gift tax exemption has been modified:

  • The amount that can be given away is $5,000,000 for 2011 and 2012 ($10,000,000 for a married couple), in lieu of the $1,000,000 gift tax exemption that has been in effect since 2002
  • The GST (generation skipping tax) limit has also been increased to $5,000,000 for 2011 and 2012, allowing for larger gifts to future generations

Gift Tax Return
A gift tax return needs to be filed only in years when taxable gifts are made. Gifts less than $13,000 per individual do not need to be reported. (However, if a couple makes a gift of up to $26,000 but splits the gift between the spouses, then a return does need to be filed so the spouse that did not own the assets can elect to use his/her exclusion.) All gifts over these amounts are recorded on the gift tax return. Over many years of gifting, the returns bring forward the cumulative taxable gifts that have been made. It is important to understand that, although they are called taxable gifts, there is no actual tax due as long as the lifetime gift tax exemption hasn't been exceeded.

The lifetime gift tax exclusion is a "unified" amount, meaning that you can use the $5,000,000 either for gift taxes or estate taxes, but not both. When the client passes away, the final gift tax return indicates the amount of the exclusion already used for lifetime giving, and only the excess can be used to pay estate taxes. For example, if John has a $7,000,000 estate and decides to make a gift of property worth $5,000,000 to his four children, the amount of the taxable gift will be $4,948,000 (the excess over four annual gift exclusion amounts of $13,000, or $52,000 total). When he dies several years later, only $52,000 of the exemption is available to offset the value of the remaining assets in his estate, with the excess subject to estate taxes.

You can make gifts of all types of property, including cash, securities, real estate, businesses, jewelry, and other personal property. You need a qualified appraisal for everything other than cash and publicly traded securities. And remember that the tax basis for the property carries over from the donor to the donee and is not stepped up to fair market value at the time of the gift.

Planning Opportunities for High Net Worth Clients
In order to benefit fully from the increased exemption, clients need a high net worth, as well as assets that will appreciate in value. It goes without saying that before making irrevocable gifts of this magnitude, clients need to understand the economics of the transaction and be assured that it doesn't reduce their net worth to an unacceptable level.

Helen Modly, CFP, ChFC, is executive vice president and director of investment services for Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 20 years of experience providing wealth-management services. She is a member of NAPFA and FPA. She can be reached at info@focus-wealth.com.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.
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