Lowering of gift and estate tax exemptions could spur transfers

This year is turning out to be a very important one for estate planning. Right now, federal lifetime exemption levels for the gift tax and the estate tax sit at $5.12 million for single persons and $10.24 million for married couples. People have an unprecedented opportunity to pass on wealth to future generations and other beneficiaries without incurring federal taxes on the transfer.

But these exemption levels will expire at the close of the year, potentially reverting to a $1 million threshold. Congress could forestall that occurrence, but many estate planners are skeptical that legislators will take action or, if they do, that the exemption levels will remain the same. It is an election year, and many in Congress may prefer to wait until the results of the presidential and congressional races are known before they act.

Some families are therefore looking to transfer certain assets this year to avoid taxation. Of course, people should only give as much as they are comfortable with. If a gift would pose a threat to a donor's financial security, it is not worth the beneficial tax treatment. In addition, people should examine how much of their lifetime exemption they have left after accounting for previous transfers.

While the primary goal of gift-giving in 2012 may be to preserve assets free of taxation, there are particular methods that can provide additional benefits to any transfer, according to estate planners. First, they recommend using a trust to transfer any assets. Trusts can prevent recipients from wasting a gift and can protect assets from the claims of creditors.

Next, they suggest examining the range of a person's assets and choosing to give those assets likely to increase in value. Keeping those assets in one's possession could mean that they may put one's estate over the future exemption level if they appreciate. Last, estate planners stress that gift-giving plans should not wait until the last minute. Making sure everything is correctly in place can take time.

Source: Reuters, "Get ahead of the coming gift-tax-apalooza," June 8, 2012.