You Gave How Much??

$5,120,000.00!!!  That’s how much someone can give away this year and not be on the hook for gift taxes.  Why this exact amount?  Because congress decided to put an “estate tax patch” good through the end of 2012 for the existing estate tax code.  Additionally, any amount exceeding that limit will ‘only’ be taxed at a maximum rate of 35%.  Knowing this, you’d think that the wealthy would be taking advantage of locking in a transfer of wealth at these somewhat attractive limits and rates when compared with the proposed alternatives for 2013 and beyond.

Why is this amount significant (other than it being a significant amount of money) right now?  If you remember back to 2010, there was 0% estate transfer tax because of the way the Economic Growth and Tax Relief and Reconciliation Act EGTRRA was drafted under the Bush administration in 2001.  Yes, our tax code actually had a one year period where someone could transfer an unlimited amount of money upon their death without paying a single penny of estate tax.   Because this 10-year ‘stimulus’ through lower tax rates (including the estate tax) was set to expire at the end of 2010, congress decided to extend out many of these tax breaks for another 2-years, one of them being the estate tax exemption amount which was set at $5,000,000 for 2011.

As this amount was indexed to inflation, the exempted amount increased to $5,120,000 for 2012.  But the major advantage of the way the estate tax is treated this year is that a person could gift this amount while they are alive, hence completing the gift while the limit is at this high point.  What this means is that even if the estate tax exemption level decreases back down to $1,000,000* for 2013 and beyond, a person/family could have saved a boat load of money by being proactive this year.

The wealth savings retained by a family utilizing this current opportunity in the tax code could save between $1,541,600 and $2,068,000.* This is the amount that could remain with loved ones (beneficiaries) because of proactive planning.  While not everyone can benefit from this lifetime gifting opportunity, it is important to understand how and when our government intends to “collect” on the fortunes built by hard working families.  Imagine if your grandfather had built a nice business over three decades, invested his earnings wisely, and now was worth $20 Million.  Do you think it is fair that the government is entitled to receive nearly half that amount?**  That is the ultimate description and act  of “redistribution of wealth”…a political term for legal theft—in itself, an oxymoron.  However you view it, that is way our country and its tax system works.  And that makes tax and estate planning that much more important.

Working with a competent estate planning attorney, tax professional, and financial planner can help enlighten families to solutions to minimize loss of wealth through transfers.  And if the estate tax exemption really does return back to the relatively low amount of $1 Million, a whole lot of families are going to need help!

*Projected indexed estate tax exemption for 2013 is $1.36MM and estate transfer tax rates range from 41% to 55%.

**When taxed at the 55% level.