2012 IS THE YEAR FOR GIFTS
2012 is a great year to give gifts because the federal gift tax exemption amount is $5.12 million this year. Unless Congress acts before the end of the year, the exemption rate will return to $1 million in 2013. The exemption amount is basically the total amount of gifts that an individual can give over their lifetime without taxation. So, in 2012, if an individual exceeds the exemption amount of $5.12 million, they would owe the IRS gift tax for any gifts given over the exemption amount. Most of us don’t pay gift tax, but it’s a tax owed by the giver. Recipients do not pay tax on gifts.
Many people also are not aware that some gifts have to be reported to the IRS. There is an annual exemption amount, currently $13,000/recipient, which does not have to be reported. Gifts of over $13,000 to one individual, excepting some family members, need to be reported. Such gifts are not taxed if they are under the lifetime exemption amount, but the reporting is required so that the IRS can keep a tally. If and when the tally exceeds the exemption amount, the giver must pay gift tax thereafter.
Gifting is a popular estate planning tool for wealthier individuals because it can remove potentially taxable assets from an estate. If someone has enough assets to maintain their lifestyle, including adequate savings, they may seek to remove other assets from their ownership so that these assets are not subject to estate taxation later. Gifting assets also allows those assets to grow estate-tax-free – so that someone can transfer stock, for instance, worth $100,000 as a gift instead of leaving it by Will to someone when it has increased in value to $150,000 (and so potentially saving the taxes on the $50,000). Givers even can leverage gifts by giving gifts to specially created trusts that purchase life insurance, which allows an even greater return on the original gift amount. Giving gifts also can incur less tax, if you have a multi-million dollar estate, than after-death bequests because a gift is taxed on the amount of the gift while an estate is taxed on the total value of the estate, not just the amount someone will receive after taxes are paid. (This is easiest to understand with a simplified example: at a 50% tax rate and no exemptions, a $1 million gift would incur a $500,000 tax and so cost $1.5 million total, while to leave someone $1 million by Will would cost an estate $2 million because a $2 million estate would pay $1 million in taxes so be left with $1 million to distribute.)
Even for those without $5 million to give away, gifting can be a rewarding and useful option. We often talk to our clients about it being more fun to give a gift while they are living than waiting to transfer assets as an inheritance once they have passed away. While you’re living, you receive the immense gratification of helping a loved one and seeing the difference that your gift can make in someone’s life.
By Maryellen Sullivan, Attorney
Powers & French, P.A. 209 Main Street, Freeport, Maine 04032; Tel: (207) 865-3135