By Claudia Buck, The Sacramento Bee –
Changes in estate tax laws can be extremely confusing. This week, Sacramento, Calif., estate planning attorney Kay Brooks answers a reader’s question about how to preserve a mother’s financial assets.
QUESTION: I’m concerned that Congress may fail to act on the 2013 estate tax law, letting the estate tax exclusion return to $1 million per individual ($2 million per couple). I’m responsible for managing my mother’s estate, which consists of $4.9 million in cash and real estate. My plan is to gift assets so that her remaining assets total $1 million cash, with no estate tax due — hopefully — when it’s time to settle her estate. How long would you wait on Congress before going ahead?
ANSWER: Gift tax issues can be confusing. First, there is a lifetime gift exemption amount, which was $1 million for many years. The 2010 tax law surprised everyone and changed it to $5 million; it goes back to $1 million on Jan. 1 unless Congress changes it.
This high gift tax exemption is very unusual. That’s why this year many wealthy people are making big gifts, assuming it will go back down to stay.
Second, the annual gift exemption is a “freebie” that does not use up any of a person’s lifetime gift exemption. This year, you can give up to $13,000 to any number of people, and the gifts do not count toward or use up any lifetime gift exemption. In addition, certain other payments for tuition or medical expenses do not use up the lifetime gift exemption, either.
Many estate planning professionals believe that Congress will not act in 2012 but sometime next year will likely raise the estate tax exemption above $1 million, retroactive to Jan. 1, 2013.
The current situation makes it extremely difficult to plan, since there is no way to know the outcome.
Your plan is for your mother to make large lifetime gifts in 2012 so that she only has $1 million left going forward. Keep in mind that a person’s estate tax exemption is reduced by any gifts a person makes using their lifetime gift tax exemption.
In other words, if your mother gifts in excess of $1 million in 2012, and the estate tax exemption decreases to $1 million in 2013, she will have no estate tax exemption left, and her entire remaining estate will be subject to tax when she dies.
If your mother can afford to make large gifts without sacrificing her standard of living, and wants to make such gifts, I recommend that she do so as soon as possible in 2012.
Any amount gifted is good tax planning, to the extent that income and future appreciation of the gifted asset are removed from the donor’s estate.
If you are considering making large lifetime gifts this year, consult with an estate planning attorney as soon as possible to identify the best strategy for your mother’s circumstances.
Besides technical expertise, involving a professional can help establish that the gifting is in your mother’s best interest. It also can protect you from conflict-of-interest charges as her fiduciary and as a gift recipient.