2012 – The Gift and Estate Tax Opportunity of a Lifetime
- United States
- 05/17/2012
For the first time in recent history, individuals can transfer up to $5,120,000 of assets tax free to their heirs during life. Unless Congress and the President act before December 31, 2012, this opportunity will vanish and the amount that an individual can transfer free of tax will go down to $1,000,000. So, in order to lock in the tax savings, a gift needs to be made before December 31, 2012.
In addition, a transfer of the above gift amount to a trust for the benefit of children that stays in trust for life but is never required to be distributed, outright, to a child, will also be able to stay out of a child’s future taxable estate to the tune of $5,120,000 (called a generation-skipping exemption). This means that estate tax is avoided in the parent’s estate as well as the child’s estate, when passing down to grandchildren. This generation-skipping benefit also will reduce down to $1,000,000 at the end of the year if Congress and the President do not act.
The best way to see the magnitude of this opportunity is by taking a look at a simple example:
Assume an individual has $10,120,000 of assets and is thinking about making a gift of the maximum exemption amount of $5,120,000 into a trust for a child. The child’s trust will distribute income and additional assets from the trust for the child’s needs and then will continue on for the benefit of the grandchildren at the death of the child. This means that, whatever the child doesn’t need, will stay in the trust until the child’s death and will not be taxed at that point. Assume in this example that the child uses the income in the trust but leaves the rest of the assets in the trust until the child’s death and that there is no growth.
Scenario 1 – Individual decides not to do the gifting plan and dies after 12/31/2012.
1) Estate tax liability: – The tax would be calculated as follows:
$10,120,000 - minus - $1,000,000 × 55% = $5,016,0002) Future tax when child dies: = $10,120,000 – minus- $5,016,000 (taxes from first death)
(assume no growth) - minus - $1,000,000 (child’s exemption at death) x 55% = $2,257,200 3) Total taxes paid: = $7,273,2004) Total assets left at child’s death: $10,120,000 - minus - $7,273,200 = $2,846,800
Scenario 2 – Individual makes gift into lifetime trust for child in 2012 of $5,120,000 and then individual dies after 12/31/2012.1) Estate tax liability: – The tax would be calculated as follows:
$10,120,000 - minus - $5,120,000 × 55% = $2,750,0002) Future tax when child dies: = $10,120,000 - minus - $5,120,000 (shielded in trust by generation-skipping exemption)
3) Total taxes paid: = $3,437,500
4) Total taxes saved: = $3,835,700
5) Total assets left at child’s death: $6,682,500 ($5,120,000 in trust and $1,562,500 from the rest of the assets)
For further information on gift and estate tax opportunities, contact Joseph T. Ducanis, Jr., Board Certified in Wills, Trusts and Estates Law or any of our statewide Trusts and Estates Attorneys: E. Jackson Boggs, Garey F. Butler, Amelia M. Campbell, Donna L. Longhouse, Gregory A. Richards, Jr., or Matthew J. Zipay.
