Better to Give It Away Before Uncle Sam Takes It Away

By Michael D. Koppel, CPA
Gray, Gray & Gray, LLP

 As a tax accountant my job is to make sure my clients meet their legal obligations to the Internal Revenue Service, while helping them to retain as much of their assets as possible. It is a delicate balance that may soon be tipped further in favor of the tax collector. This is especially true for successful business owners who have managed to accumulate significant savings.

President Obama’s 2013 federal budget proposal includes a provision that would roll back estate tax rates and exemptions to 2009 levels. That’s not good news, as the gift and estate tax exemptions have been very favorable for the past few years. The potential reversion makes it imperative for you to consider preserving your assets by giving them away. This year may be the last year for a long time that “gifting” will be a highly effective way to protect your money from the taxman.

Gifting has long been an essential wealth management and estate-planning tool. By making a gift of your assets while you are still alive, you can decide where your money will go and avoid steep estate taxes. But the amount you are allowed to gift tax-free may be about to change dramatically, making 2012 a year when you may want to accelerate your gifting.

The Most Favorable Time is Now

The estate and gift tax lifetime exclusion, which is the amount that a person can gift to another in excess of the annual exclusion without paying taxes, is $5,120,000 – the most it has ever been. (Keep in mind that gifts between spouses are tax-free and a spouse can join in a gift to double the exemption.) But the current exemptions expire at the end of 2012. While nobody can be certain what will happen next year, the President has proposed significant changes in gift and estate taxes in his proposed 2013 budget that would roll back the exemptions to a much lower level. This would expose more of your assets to estate taxes.

The budget proposal reduces the estate tax exclusion to $3,500,000 with a maximum top rate of 45%.  That’s not the worst news.  The proposal would “unlink” the gift and estate exclusion.  The new gifting exclusion would be reduced to $1,000,000. This reduction would significantly reduce the ability to make significant gifts, especially for parents who own a business and intend to provide the next generation ownership opportunities.

Business succession may be further complicated by restrictions on discounts. Valuation discounts are an important part of gift and estate planning. Discounts are often taken for lack of marketability and lack of control.  These discounts can substantially leverage the amounts of gifts. Combined discounts of 40% are not unusual. This means that a gift with a value of $5,000,000 would only use $3,000,000 of gift tax exclusion. The proposed budget indicates it would limit discounting but does not indicate how.

Changes to Trusts

The proposed federal budget also affects trusts, including Grantor Retained Annuity Trusts (GRATs)………

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