With the federal current estate tax exemption amount and rate scheduled to expire at the end of the year, much uncertainly looms as to whether Congress will enact permanent legislation, and if so, what will result. As there are several possibilities, ranging from a $1,000,000 exemption amount to keeping the current exemption amount (and alternative amounts in between), only one thing is certain: no one can possibly speculate what the exemption amount will be in 2013 and beyond. In the meantime, as the uncertainty continues, there is great opportunity (and perhaps unprecedented opportunity) for individuals to utilize this year’s exemption amount ($5,120,000 per individual) to make sizeable gifts during these last five months of the year to ultimately lower their taxable estates. However, gifting is certainly not for everyone as individuals must be financially and emotionally comfortable with divesting themselves of these assets and any and all associated interest/income stream from these assets.

Once the individual has decided he or she is comfortable with gifting, there are several considerations that need to be addressed. First, what assets are most appropriate? Most likely the answer would be highly appreciating assets as they would remove the most possible value from an individual’s estate. Next, what is the best way to make a gift? There are a number of vehicles that can be examined, but one that continues to be an excellent option especially in light of the low interest rate environment is the Grantor Retained Annuity Trust (“GRAT”). The GRAT can be structured to result in almost no gift tax implications and it enables the donor to receive an income stream for a term of years, with the growth passing to the donees.

Gifting during life is more tax efficient than property passing through a decedent’s Will at death, as assets transferred during life shift the future appreciation in the property out of the individual’s estate to the donee. However, one caveat is that gifted property retains carry over basis for income tax purposes. At death, inherited property gets a stepped-up basis for income tax purposes. Any taxable gifts made in calendar year 2012 will need to be reported on a United States Gift (and Generation Skipping Tax) Tax Return (IRS Form 709) and would be due on April 15, 2013. However, no tax will be due to the extent the individual has not utilized his or her lifetime gifting exemption ($5,120,000 or $10,240,000 for a married couple for 2012). New Jersey does not have an independent gift tax.

In addition to the above gifting, every individual has a $13,000 per donee “annual exclusion” amount which is adjusted each year for inflation. This would enable an individual to gift $13,000 ($26,000 for a married couple) to each donee (to any number of donees) without necessitating the filing of IRS Form 709.
Please feel free to contact us for more information and to talk about these opportunities.

Nicole E. Russak, Esq. is an associate attorney practicing in the firm’s Tax, Trust and Estate and Real Estate Departments.

  • Nicole… In your blog post above, it’s stated that “This would enable an individual to gift $13,000 ($26,000 for a married couple) to each donee (to any number of donees) without necessitating the filing of IRS Form 709.”

    My understanding is that if one wishes to take advantage of the $26K limit as a married couple, that the IRS requires a Form 709 be filed indicating that Gift Splitting is occurring.

    Can you comment?

    • Hi Ken, Thank you for your comment. Nicole is away on vacation, but in her absence, AnnMarie Smits, our Tax, Trust and Estate Partner and Chairperson advises that $13,000 (now $14,000 in 2013) can be given by each individual to another individual and no reporting is necessary. Reporting is only necessary if you give more than that amount to any one individual in any calendar year. If $26,000 (now $28,000) is given by a husband and wife the same rule applies. Gift splitting is not necessary if the amount comes from joint accounts. Actual gift splitting if all the funds come from one spouse and the second would like to join must be done on a gift tax return. We advise couples to gift from joint accounts to avoid this technicality. Despite all of the above, it is always a good idea to file a gift tax return to get the statute running so that the taxing authority cannot come back and dispute what you have done.

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