One of the comforting provisions of the American Taxpayer Relief Act of 2012 (ATRA) is the continuation of the inflation adjustment to the Estate Tax and Lifetime Gift Tax exemptions. The exemption that started at $5,000,000 in 2010 was immediately adjusted to $5,250,000 for 2013. The IRS announced that the adjusted exemption for 2014 will be $5,340,000. Many clients made large gifts at the end of 2012 due to a fear that the exemption would be reduced to as low as $1,000,000, but the exemption, in fact, increased for 2013. From a tax standpoint it is always better to make gifts sooner rather than later (in order to allow for appreciation in value to avoid estate tax) and thus it is probably a good idea to consider whether you want to make gifts prior to year end. As long as inflation remains low, the annual incremental adjustment will likewise remain low; if inflation increases as many economists fear, the increments will increase. The $14,000 annual gift tax exclusion remains the same for 2013.
Remember these key points about gifts to individuals:
- An annual exclusion gift must be outright or in a trust or other arrangement that is designed to qualify for the annual exclusion (a transfer to a 2503(c) trust, a demand trust or so-called Crummey Trust or a transfer under the Uniform Transfer to Minors Act).
- Married couples can together transfer two annual exclusion amounts to one person.
- In stable family situations, the annual exclusions can be doubled again by making a gift to the spouse of a child.
- Gifts that exceed the annual exclusion amount as to any recipient should be reported on a timely filed Form 709-US Gift Tax Return, which is due at the same time as personal income tax returns. No gift tax will be payable unless the the life time exemption has already been utilized, i.e., the aggregate value of current year and prior gifts in excess of the annual exclusion plus the aggregate value of current year and prior gifts that did not qualify for the annual exclusion reduce the amount of the gift tax exemption available.
- If the funds for the gift come from only one spouse, the other spouse can consent to the gift being treated as if made by that spouse, which is referred to as gift-splitting.
- Gifts can be made by transferring cash, partial interests in real estate, tangible personal property, including art and other collectibles, shares in publicly traded securities or interests in closely held businesses. The latter can present valuation difficulties.
- Property transferred by gift has the same cost basis as the donor. When the gift recipient sells the gifted property, their gain will be the excess realized over the original basis, plus or minus any adjustments to the cost basis after the gift. Giving away assets with a higher cost basis may be better overall tax planning.
The 3.8% surtax on Net Investment Income will cause tax increases for high income earners and most estates and trusts in 2013 and in the years following. While individual taxpayers are subjected to this new tax at fairly high thresholds, estates and trusts will be subject to this tax plus the 39.6% income tax on all taxable income in excess of $11,950 in 2013 and $12,150 in 2014. If you are a fiduciary or a beneficiary of an estate or trust, you should be asking questions about measures that may help to reduce the impact of these very high rates.