Important Considerations For 2012 Year End Planning
August 14, 2012
MORRIS & MCVEIGH LLP
767 Third Avenue
New York, NY 10017-2023
August 14, 2012
TO: OUR CLIENTS AND FRIENDS
There are substantial tax planning opportunities available for individuals through the end of 2012, which could result in significant savings.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”) applies to individuals dying or making gifts after December 31, 2009 and before January 1, 2013 and permits individuals to pass up to $5,120,000 free of federal estate and gift tax in 2012. For transfers in excess of $5,120,000, whether occurring at death or by gift, a 35% federal tax rate will apply. On January 1, 2013, absent the passage of any legislation, estate, gift and generation-skipping transfer taxes will be due on transfers in excess of $1,000,000 (indexed for inflation) and the federal tax rate on those transfers will increase to 55%.
Significant tax savings also are available for gifts made to grandchildren in 2012. Generation-skipping transfers (“GST”) refer to transfers made by a decedent or donor to a grandchild or younger generation, which skips his or her child. In 2012, only generation-skipping transfers made at death or during life in excess of $5,120,000 are subject to GST tax, which is in addition to the federal estate tax. The tax rate is currently 35%.
In addition, portability, introduced as part of the 2010 Tax Act, allows a surviving spouse to use (during life or at death) the unused portion of his or her last predeceased spouse’s applicable exclusion amount if the first spouse dies after December 31, 2010 and before January 1, 2013. (GST is not subject to portability, so any unused GST exclusion amounts cannot be used by the surviving spouse.)
New York State imposes no gift tax on lifetime transfers, but it does impose a state estate tax. Thus, if New York State residents transfer $5,120,000 or less in 2012, they pay no federal or state gift tax, but if a resident dies with assets in excess of $1,000,000, that person’s estate is subject to New York State estate tax. Therefore, New York State residents who are in a position to do so may want to consider making substantial gifts before the end of this year.
In addition to the lifetime exclusion of $5,120,000, an individual may transfer $13,000 in any year to any number of individuals without paying any gift tax or filing any gift tax returns (this is referred to as the annual exclusion). Married couples can transfer up to $26,000 jointly each year. Payments of tuition and medical expenses made directly to the providers are another means of making additional gifts to an individual. Such payments are not subject to gift tax and are not subject to the lifetime exclusion limits or to the annual exclusion limits. However, reimbursements to an individual for those same medical and educational expenses do not fall within this exclusion.
Another tax saving effect of making gifts during life is that both the assets and the appreciation on those assets are no longer a part of the donor’s estate for estate tax purposes. [Because gifts retain the donor’s basis and a step-up in basis only occurs when assets are transferred as a result of someone’s death, it usually does not make sense to gift low basis assets.]
Although we hope that Congress and the President will address the estate and gift tax laws, we cannot predict the specifics of any new laws nor when any revisions will take effect once the 2010 Tax Act sunsets on December 31, 2012.
Please contact us to discuss planning opportunities.
Circular 230 Disclosure Notice: To ensure compliance with Treasury Department rules governing tax practice, we inform you that any advice contained herein (including in any attachment) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.