ALERT: Gift Tax Exemptions Could Be Significantly Lowered By Next Week

November 15, 2011
150x100 ALERT: Gift Tax Exemptions Could Be Significantly Lowered By Next Week

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There is an increasing buzz in the estate planning community regarding the decisions the Super Committee must make by next Wednesday, November 23.

As we have discussed previously, the Super Committee is made of six Democrats and six Republicans evenly split from the U.S. House and Senate.  Their task is to come up with a combined plan to reduce the $1.2 trillion budget deficit over the next 10 years.  If no agreement is reached, then a $1.2 trillion across-the-board cut of domestic spending and defense programs will automatically take effect.

Reduction of Gift Tax Lifetime Exclusion to $1 Million?

Since November 23 is closing in, there is increasing speculation about how or if the Super Committee will act.  Perhaps the biggest rumor involves the gift tax.

One proposal getting a lot of press is the potential reduction of the Gift Tax lifetime exclusion from $5 million down to $1 million.  In other words, this essentially means that if the measure passes, every person who collectively gives gifts totaling more than $1 million during their lifetimes would owe gift taxes on any excess.

This idea is of great interest in the estate planning community, mainly due to the following factors:

The Size of the Drop

A loss in exemption of $4 million is obviously quite significant.

For example, let’s say the drop from $5 million to $1 million is to occur on January 1, 2012:

  • A person making a $5 million non-charitable gift on December 31 would owe $0 in gift taxes.
  • If instead, the same person made the $5 million non-charitable gift the next day on January 1, he or she would owe approximately $1.4 million in gift taxes (assuming that the gift tax rate doesn’t increase).

Next Week as the Effective Date?

There is also the rumor that not only will the change be approved by next week, but that it will also be effective next week.

  • In other words, our example from above would not apply to December 31 and January 1.  Instead, it would apply to next Tuesday and Wednesday.
  • This would be at least the third time in the last 12 months that the government has implemented a change in tax law that in practice forced action within a short period of time, including:
    • The 2010 Tax Relief Act passed on December 17, 2010 created a 14-day loophole that would allow huge tax savings on generation-skipping gifts.
    • While the 2010 Form 706 (the U.S. Estate Tax Return) wasn’t released by the IRS until September 3, 2011, it proclaimed the form’s due date as September 19, 2011, a mere 16 days later.

Yet Another Change in the Estate and Gift Tax

When passed into law last December, the $5 million gift tax lifetime exemption was to last at least through 2012.  Instead, this would be the second change to the exemption within 12 months.

In fact, since 2001, there has been only one calendar year where there wasn’t some change in the estate/gift tax lifetime exemption or the estate/gift tax rate.

Likelihood of Passage?

Interestingly, earlier today, I was one of hundreds of estate attorneys who attended a webinar sponsored by WealthCounsel, entitled “Most Compelling Opportunities Now:  Making Two Years Last a Lifetime”.

Quickly after the talk began, an informal poll was taken, asking the audience what would be the most likely change in estate and gift taxes in the near future.

  • About two-thirds believed that the hardest decisions would be deferred and become a Presidential election issue next year.
  • Another one quarter thought that the rates and exemptions in place in 2009 would become the permanent standard.
  • Still others thought that the rates and exemptions in place today would remain indefinitely.
  • How many thought the Super Committee’s proposal to lower the gift tax discussed above would pass by November 23 (or January 1)?  About 6%.

On the other hand, I don’t believe anyone polled consulted their crystal balls.

Stay tuned for further updates and developments.

 ALERT: Gift Tax Exemptions Could Be Significantly Lowered By Next Week
 ALERT: Gift Tax Exemptions Could Be Significantly Lowered By Next Week

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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4 Responses to ALERT: Gift Tax Exemptions Could Be Significantly Lowered By Next Week

  1. November 16, 2011 at 4:28 am

    Well. Lowering the gift tax exemption may not solve the tax problem facing the state, but I guess it helps.

    • Scott
      November 16, 2011 at 11:24 am

      Ricky–

      I’m not sure that I follow. If you are referring to a specific state, remember that the gift tax exemption discussed above applies to federal gift taxes — state taxation is separate. If you are referring to the United States as “the state”, why do you think this would not go at least some distance at solving the tax problem?

      Thank you for your response.

      Scott

  2. December 4, 2011 at 2:16 pm

    Hey Scott: Another case of a lot of talk and no action. You make some great points as to using the lifetime gift tax exemption. It is a powerful lifetime estate planning technique especially where it is used to get assets that have a great chance of appreciating in value out of the taxable estate. Also, readers should know that this strategy can be enhanced with use of minority interest/lack of marketability discounts in the right context. Using something like a family limited partnership/LLC to use up this exemption even at $1 million is often times a great idea. Anyway I think this super committee failed to get anything done, so the $5 million is still there for our clients.
    Your posts are really great for your readers; keep them coming!

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