Estate and gift taxes affect not just the very wealthy. Many middle-class Americans have assets of more than a million.
Currently gifts and estates of up to $5.12 million are exempt from taxes, but as part of the fiscal cliff, any bequest of more than $1 million will be taxed next year -- and at a 55% rate (currently the rate is 35%). That will kick in unless Congress and the President agree to extend the current exemption or agree on a new one. Many older Americans are not waiting to see if that happens.
"It's crazy," said Richard Behrendt, Director of Estate Planning for Baird's Private Wealth Management. "I bet more wealth is transferred this year than in the past 10 years combined."
Jonathan Blattmachr, a principal of Eagle River Advisors in New York who has lectured groups of estate planners about the expiring exemption, said the amount given away in 2012 will be three or four times that of any other year.
The drop to a $1 million exemption means that the tax hit on gifts or estates of $5.12 million will go from zero this year to $2.266 million next year, according to Blattmachr. The gridlock in Washington could result in the exemption staying that low, perhaps for years.
"The fear is that we'll go over the fiscal cliff and never correct that," said Robert Keebler, a Green Bay, Wis.-based estate planner.
As long as the exemption stays at the million-dollar level, the estate of anyone who dies will have to pay at the higher rate, he said.
Estate and gift taxes affect not just the very wealthy. Many middle-class Americans have assets of more than a million. Now, they may feel like they need to give away more of their wealth before they die.
Not everyone who can transfer their money should do it, said Behrendt. Sure, if they're 93 years old and failing, it's a good idea. Others should proceed with caution, being careful not to part with assets they might later need.
"I worry about 65-year-old, recently retired couples on fixed incomes with $3 million or $4 million in assets reading about what a tremendous opportunity it is," said Behrendt.
Also, many people may be under the impression that if they give a gift below this year's $5.12 million exemption level, they'll still have some exemption left to use in the future. But any gift made this year counts against the exemption in effect the year they die. So if the exemption drops, as scheduled, to $1 million in 2013, a gift of a million or more made anytime in the past completely exhausts the exemption. The entire remaining estate will be taxed at 55%.
They also have to understand that, to qualify, the gifts must be permanent and irrevocable. The asset doesn't belong to them any more.
For example, many couples consider transferring their home, which is often their biggest asset, but want to remain living there for a while.
They can do that through a personal residence trust but since these cannot be sold while the trust is in effect, most people prefer another kind, a qualified personal residence trust.
Those, however, come with their own restrictions. For one thing, the givers must specify a term for the trust, the length of time they'll stay before their heirs take possession. Choosing the right term is crucial. The givers may be in good health and figure they have a good 10 years before they'll want to move. But if they die before the 10 year term is up, the house reverts back to the estate. "Then it's taxed like it was never given away," said Blattmachr.
Gifts made this year can keep on giving if astutely chosen, according to David Hryck, U.S. Head of International Tax at SNR Denton. That's because the value of transferred assets are figured at the market value at the time of the gift.
Thus, a $5 million stock portfolio transfers for free this year and any amount it appreciates between now and when the giver dies escapes the death taxes it would have been subject to had it not been given away.
Choosing what assets to transfer, then, is an issue.
"You have to do the math," said Hryck, an adviser to major entertainers and businesspeople. "You have to pick and choose which asset to give. You want to give away the one that will go up most in value."
If, for example, there's a choice between a hot tech stock and a slowly appreciating real estate holding, gifting the stock means the estate will pay less in tax.
But you never know. The tech company stock could tank and a new housing boom could send real estate soaring.
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