At the end of 2010, federal tax law changed to raise the federal estate, gift and generation skipping transfer tax exemptions to $5 million per person for 2011 and $5.12 million for 2012. (The state estate tax exemptions vary as each state sets its own unique exemption amount, currently Minnesota and Oregon retain a $1 million exemption; Washington a $2 million exemption, while Utah currently has no estate tax.) In addition, Congress extended the reduced income tax rates enacted in 2001, including top rates of 35% on ordinary income and 15% on capital gains and qualified dividends. These rates will be in effect until the end of 2012 with the federal exemption returning to just $1 million in 2013 (provided Congress does not act to reduce the exemption earlier.) At the same time, the assumed federal rates for gifts or interfamily transfers or sales is at a historic low (currently 1.4 percent for November 2011).
As a result, it is an excellent time to consider making gifts or other types of transfers to family members. Although the law as it currently stands extends these tax opportunities to the end of 2012, it is possible that Congress may end these benefits sooner.
Having the increased federal gift tax exemption of $5 million means that couples can give up to $10 million of assets now without incurring federal gift tax (reduced by the amount of any taxable gifts they previously made to children or other individuals). Minnesota, Oregon, Washington and Utah do not currently have a state gift tax. Also, making current gifts provides an opportunity to shift appreciation on assets that may currently have a depressed value to children or other family members at little or no gift tax cost.
There are several transfer techniques that are particularly attractive now given the low assumed federal interest rates. Strategies such as grantor retained annuity trusts (GRATs), installment sales to grantor trusts, charitable lead trusts, and low-interest intrafamily loans all present great tax planning opportunities. In addition, with lower home values a person may be interested in making a gift to a qualified personal residence trusts (QPRT) and retaining the right to live in the home or vacation home. A charitable remainder trust may also be of interest if a person wishes to make a gift of stock to a trust that will provide a stream of payments to the donor or a family member but then ultimately benefit a charity.
We expect that many of our clients may want to either revise their estate planning documents to address these changes, or discuss the significant lifetime planning opportunities. Please let us know if we can be of any assistance.