Large Gifts as a Strategic Part of Family Wealth Transfer

August 11, 2012

The larger the gift, the more strategic the giver must be in planning and executing it.

This is not only because a recipient can generally do more with a bigger gift than a smaller one. To maximize the size of the gift itself, it is important to minimize the impact of all types of inheritance taxes, including estate and gift taxes. This requires careful choices concerning how a wealth transfer is structured.

This article will discuss a particular choice facing wealthy families in New Jersey and across the country: whether and how to make gifts to family members to take advantage of the current inheritance tax exemption. That exemption is scheduled to be greatly reduced at the end of the year, unless Congress takes action to extend it.

Window of Opportunity on Gift Taxes

In 2010, Congress raised the lifetime gift-tax exclusion from $1 million to $5 million per person. This created a remarkable opportunity for wealth transfer with minimal tax consequences. With adjustment for inflation, the amount that each person can exclude from gift and estate tax is now $5.12 million for this year.

Doing the math, this means that a married couple can give up to $10.24 million without the gifts being subject to federal estate or gift taxes. In the absence of Congressional action, though, the amount will drop back down to $2 million per couple, or $1 million per individual, beginning on January 1. Gifts above that amount will be taxed at a rate of up to 55 percent.

The scope of the coming change is reflected in the number of families that will likely be subject to estate taxes if the exclusion reverts to the old amounts. An estimated 3,300 households will play estate taxes this year. The number could increase to 52,000 next year, according to figures from the Tax Policy Center in Washington, DC.

Making a Decision About Lifetime Gifts

Successful owners of family business are among those considering how to respond to the upcoming change in the law. Investing in others in the form of a gift comes naturally to such people. This is especially the case when a lifetime gift also empowers the next generation to take a more active role in operating the business or pursuing other ventures.

Families can potentially save millions in taxes by making large gifts now, before the federal gift-tax exclusion amounts revert to their 2010 levels. After all, it is very uncertain whether Congress will extend the current amounts.

To be sure, those considering making large gifts should also carefully weigh how much money they need for themselves in retirement. Taking that step is only prudent, particularly given the financial volatility of the Great Recession and its aftermath.

It is also well worth discussing other estate planning options with an experienced attorney. These options could include, for example, the role of irrevocable trusts in transferring wealth to children or other family members.

Keep in mind, however, that the most immediate decision is whether to take advantage of the current federal gift-tax exclusion amounts before the December deadline. If you are already considering making a large gift, it may indeed be time to think big.

Article provided by Kirsch Gartenberg & Howard
Visit us at www.kghlaw.com