To Give or Not to Give (up to $5.12 Million)

Time may be running out for one of the biggest tax breaks for Americans: the chance to gift up to $5.12 million to heirs tax-free and then pay “only” 35 percent gift tax on a gift above that. The break is scheduled to expire on December 31, 2012.

The original $5 million limit was increased this year for inflation to the $5.12 million and is separate from the $13,000 annual exclusion gift. While this tax break is enticing, the fear of what lay ahead in the economy and financial markets has made people cautions.

Now, people are faced with a really difficult choice: do they gift their heirs the full amount of the exemption and be grateful that the money will help the heirs now and reduce their eventual estate tax bill, or do they give less, or none at all, for fear that they could be left with not enough to live?

The deadline for making a decision is fast approaching because advisers say it takes approximatelythree months to do everything that needs to be done to set up a gift of this size.

Estate Planners agree that these financial decisions are about more than just saving on taxes, although doing the math on both the tax consequence and compound interest is compelling because after years of “only” a $1 million gift exemption, estate planners agreed that this was a once-in-a-lifetime opportunity.

Adding to the benefit of the large tax exemption is the amount by which the gift will grow. A beneficiary who receives $5 million today in a trust that is wisely invested could see growth in 30 years to nearly $29 million, at a 6 percent return every year; this also reduces the donor’s estate by the same $29 million!

Some people rightfully question the effect of a large gift on their heirs: will the gift rob their children of motivation?

For those who decide to make a substantial gift, there are many different ways to do it. Obviously, writing a check is the simplest way, but estate planners would tell you that would leave the money unprotected against creditors, and it would also waste an opportunity to use various strategies to multiply the gift. Putting appreciated securities in a trust would seem to be a good idea, but that could lock up liquid assets that might be needed. Another option for people worried about having enough liquid assets is to put real estate or a private business into a trust.

If a trust format is utilized for your personal residence, it must be done very carefully because if the people making a gift of their residence to a trust then rent it back from the trust, it may very well attract the I.R.S. scrutiny.

Tarta Law Firm NJSteven W. Tarta, Esq. brings more than 45 years of professional experience to his practice, with a sophisticated focus on Estate Tax Planning, Living Trusts and Elder Law.

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