The Last (Really BIG) Tax-Free Gift

Under current federal estate tax law there is an exclusion up to $5.12 million in 2012. Taxable estates above this amount are taxed at 35%. This exclusion is scheduled to decrease to $1 million beginning in 2013. The tax rate will also increase to 55%. This exclusion can be used either at death or during life.  In other words, the federal estate tax and the federal gift tax are unified.

There is speculation that Congress won’t allow this exclusion to drop from over $5 million to just $1 million.  President Obama has proposed to reinstitute the 2009 levels, a $3,500,000 exclusion with a 45% tax rate. The Republicans would prefer to eliminate the estate tax.

Recapture or Claw Back

Estate planning attorneys, CPA’s and financial advisors have been busy trying to take advantage of this. The wealthy, and their advisors, perceive this as a once-in-a-lifetime opportunity to transfer assets to the next generation without any taxes.

High net-worth people should take pause. It’s possible this large gift you are considering may be subject to recapture (“claw back”). Many years ago the federal estate tax exclusion was only $600,000. Through the years the exclusion has always gone up. As was mentioned earlier the 2012 exclusion is $5.12 million. As of now, for the first time, the exclusion is scheduled to decrease.  This may have an impact if the exclusion is lower and gifts were made that exceeded the exclusion when you died. For example, if someone made a $5 million gift in 2012 and died in 2013, it’s possible $4 million would be recaptured as the exclusion in 2013 currently is only $1 million.


Connecticut Estate Tax

Connecticut residents need to be cautious with their gifting strategy. Connecticut imposes an estate tax on estates in excess of $2,000,000. The Connecticut Gift Tax Rate starts at 7.2% and goes up to 12%.

Most people need to be careful with their gifting strategy.  Can you afford to give away these assets?  For many, the answer is no.


Annual Exclusion

For more modest gifts, taxpayers can give away up to $13,000 in 2012 to an unlimited number of people without having to file a gift tax return or pay a gift tax. This is known as the annual exclusion. The exclusion is scheduled to increase to $14,000 in 2013. There is no income tax deduction for the person making this gift. There is also no income tax on the person receiving the gift.  The donor however gets this asset out of their estate.

In addition to the annual exclusion, taxpayers may be able to pay certain educational and medical expenses.  Qualified payments made directly to the higher educational institution or the medical provider are allowed in addition to the annual exclusion.  This allows grandparents to pay for college and not incur a gift tax.

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Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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