The 2010 Tax Relief Act increases the lifetime exemption from the gift tax and the estate tax to $5 million dollars in 2011 and 2012.
This means that there is no gift tax if the total value of aggregate lifetime gifts (excluding gifts qualifying for the annual exclusions of $13,000 per donee for the calendar year 2011)is $5 million dollars or less. Similarly, there is no federal estate tax if the amount of aggregate lifetime gifts (excluding gifts qualifying for the annual exclusions of $13,000 per donee) plus the value in the estate at death is $5 million dollars or less. Although Minnesota does not have a gift tax, it has an estate tax on taxable estates in excess of $1 million.
Donors should consider making lifetime gifts to take advantage of the $5 million dollar exemption before it sunsets on December 31, 2012.
The $5 million lifetime gift tax exemption affords an opportunity for gifting during lifetime for both tax and nontax reasons. Some reasons to take advantage of the increased exemption during life include:
- Future appreciation on gifted assets is not includable in the donor's estate.
- Parents want their children or grandchildren to have money when they need it.
- Business owners want to transfer ownership of their business to their children or grandchildren.
- Parents want to transfer real estate (like cabins and vacation homes) to their children or grandchildren to eliminate their ongoing responsibility or provide an operating structure for future financial, administrative and maintenance responsibilities.
- In second marriages, a parent may want to transfer assets to make sure his/her natural children get their inheritance.
The disadvantage of a gift in the hands of the donee is that the donee's basis is the same as the donor's when the gift has increased in value since the acquisition of it by the donor. That is, it will not be the fair market value on the date of death ("stepped-up basis") as it could be in a transfer at death.
A federal gift tax return should be filed for annual gifts over $13,000 to any non-spouse donee. Where gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) the spouses file. (Because more than $13,000 is being transferred by a spouse, a gift tax return will have to be filed, even if the $26,000 exclusion covers the gift.) Normally, "gift letters," checks, deeds and other transfer instruments are used to document gifts. An appraisal is sometimes needed to support the value of those gifts not readily determined by a published value. Discounts to value are sometimes available as a result of a gift of a minority interest in a property or entity because there are restrictions on transfer or disposition. Currently Minnesota does not have a gift tax so this is strictly a federal tax issue.
The 2010 Tax Relief Act also introduces "portability" of the applicable credit between spouses. That is, any part of the $5 million not used by the spouse first to die can be carried over and used upon the death of the surviving spouse--but only if a federal estate tax return is prepared, a proper election is made and the federal estate tax return is filed on the first death.
The risk exists that if the exemptions provided under the current law are not used they may not be available after 2012. It is anyone's guess what Congress will do after December 31, 2012, but the assumption is that if lifetime gifts up to $5 million are made, they will be honored and not somehow brought back into the estate of the donor. There is some discussion of a possible clawback of the gifts into the donor's taxable estate if the $5 million dollar exemption gets reduced in the future but the clawback is unlikely from this viewpoint in time.
