One advantage of this year’s large gift tax exclusion and low tax rate is that they match the estate tax parameters—you don’t have to die to take advantage of the bargain basement prices for passing on your wealth.
The estate and gift tax has seen many changes over the past decade, but its most recent uncertainty has sent the wealthy to their advisors for advice on what to do with their assets. As Forbes discusses in the article, Give Now or Pay Later: Rich Face Dilemma With Fate Of Estate And Gift Taxes Up In Air, there are consequences for both giving now and waiting until later. What is the best choice for those large gifts?
Basically, the current estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. And unless Congress takes action, on January 1, the tax will return to a $1 million exemption with the excess taxed at 55 percent. Accordingly, the wealthy may want to consider giving large gifts before the end of the year.
However, proceed with caution. If you are gifting assets to your nephew that have appreciated in value, your gift comes with your basis – the amount you paid for the asset. If your nephew sells the asset, he will owe tax on both your capital gain and any appreciation after the gift. If your nephew inherits the asset, however, he will only owe capital gains tax on the gains that occur after inheriting the assets.
All of the uncertainty surrounding the federal estate and gift taxes could prompt the wealthy to make hasty, ill-advised gifts. To avoid doing so, and potentially costing you or your loved ones millions of dollars, consult with your estate planning attorney beforehand.
Reference: Forbes (December 17, 2012) “Give Now of Pay Later: Rich Face Dilemma With Fate of Estate and Gift Taxes Up In Air”
For more information on Giving Large Gifts Now or Later, please visit our Estate Planning website.