Brief Estate and Gift Tax 2012 Update

This is a brief estate and gift tax update for 2012 .



For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011 and the estate tax rate will be 35%.   The lifetime gift tax exemption and generation-skipping transfer tax exemption in 2012 will be also be $5,120,000 million each and the tax rate for both of these taxes will also be 35%.

Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion from gift tax in 2012 remains at $13,000.

Beware people advising making gifts up to the gift tax exemption amount of $5,120,000.  We’re finding that taxpayers are getting incomplete advice in this area.  It is true you can make a gift up to your lifetime exclusion amount without facing immediate gift tax consequences.  However, your lifetime gifts are added back into the value of your estate for estate tax purposes at the time of your death.

Here is one scenario that demonstrates the risk. Let’s assume that congress doesn’t change the rules in 2013 and the exemption amount stays at $5 million (and we’ll ignore the indexing up to $5,120,00 to keep the math clear).  This year, an unmarried individual decides to gift the value of their entire lifetime exclusion plus their $13,000 annual exclusion to an irrevocable trust for a total gift amount of $5,013,000.  The individual retains $1,000,000 in their estate and dies in 2016.  The value of the lifetime gift is included in the calculation of the value of the estate and the individual has an estate valued at $6,013,000 for estate tax purposes.  The individual avoided paying tax on the gift during life but may face an estate tax consequence after death.  Additionally, if the exemption amount drops from $5 million to 1$ million in 2013, the estate tax impact may be significant.

Whether or not it makes sense in your situation to make the gift will depend greatly on the facts at hand and your level of risk aversion. Just be wary of people giving incomplete advice. If you would like to discuss your options, we are available to talk with you at 415-781-4000.