Estate Tax Law: To give or not to give…

Posted by on Oct 4, 2012

This time of year, clients are asking me:  what’s going to happen to the estate tax law at the end of 2012?  I wish I knew.  We all need to stay tuned to news events in the coming weeks as the end of the year approaches.

Both of the ruling political parties play political games with the estate tax law, and this year is no different.

We’re in the same predicament we were in toward the end of 2010 when Congress had not yet acted and the estate tax law was then about to “sunset” at the end of December 2010.

Then, in the final weeks of 2010, Congress set the size of an estate excluded from federal estate tax at $5 million per person, meaning the current law affects only the very wealthy.  But, they made that exemption effective only for 2011 and 2012, with the law scheduled to sunset again in December 2012, reverting to an exemption of only $1 million per person — unless Congress takes further action.  In 2010, the two ruling parties could not agree on a predictable, permanent estate tax law so they kicked the issue down the road to 2012, thus ensuring that election year politics make compromise difficult if not impossible.

For years estate lawyers have created trusts for married couples that allow flexibility and a sheltering of estates from tax upon the first spouse’s death.  We have little to offer for single people and surviving spouses.

If the current law sunsets and the $1 million exemption returns, we will have many taxable estates and there will be a great hue and cry about how unfair this is to people who are not particularly wealthy but whose home values – still – have made them millionaires.  I personally agree that a $1 million exemption will cause disproportionate harm toward the middle class, whereas a larger exemption would mean estate taxes only for the very wealthy, who can more easily afford to pay and who, arguable, should pay.

One obvious way of minimizing potential estate taxes is to reduce the size of one’s estate.  In any given year, one can give up to $13,000 per donee without that gift counting toward one’s $1 million lifetime exclusion from gift taxes.  A married couple, for example, can each give away $13,000 to each of their children each year, without having it taxed as a gift.

The logic of the gift tax is this:  if wealthy people could avoid postmortem estate taxes by giving away all their wealth while alive, they might do so.  Therefore, there is a tax on gifts over a certain amount over one’s life time.  The $13,000 per year is sort of a “free” way of giving away money – if one has it to spare.

This year, 2012, there’s a unique gifting opportunity in that one can give up to $5.12 million without it counting as a taxable gift.   For those who are worried about a return of a $1 million exemption from estate tax, making a large gift before the end of the year might be a way to go.

Note:  I am not advising people to do this, just as I don’t give advice about making annual gifts of $13,000.  That is the kind of discussion best had with your financial advisors and tax professionals.  Giving away money while you are alive is a tricky proposition because you may need it for yourself.

Stay tuned for future news about changes in the estate and gift tax law.