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"How Can You Benefit More By Making  

Larger Annual Exclusion Gifts in 2013?"


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Estate Planning Update
October 2012

The IRS announced recently that the limit for "annual exclusion gifts" - the yearly amount of "present interest" gifts that an individual taxpayer can give tax-free to each recipient - will increase from $13,000 in 2012 to $14,000 in 2013. (A "present interest" gift is one that may be used immediately.) Annual exclusion gifts do not count against your "basic exclusion amount" - the cumulative amount of taxable gifts that you can make throughout your lifetime and at your death before gift tax or estate tax is owed. In 2012, the basic exclusion amount is $5.12M; and any lifetime or testamentary (at death) gifts over this amount are taxed at 35%. However, the basic exclusion amount will drop to only $1M on January 1, 2013; and any gifts over this amount will be taxed at 55%.

Advantages of Making Lifetime Gifts
One of the significant advantages of making gifts during your lifetime is that the value of the gifted assets won't be included in your taxable estate at your death (many, many years from now). Consequently, more of your wealth will pass to your children; and less (or none) will be owed to the U.S. Treasury in estate taxes. Furthermore, any subsequent appreciation in the value of an asset gifted during your lifetime won't be subject to tax in your estate either. Therefore, if you give your children an asset that is worth $1M today, which will be worth $2M at your death, you would save them $550,000 in estate taxes.
Simple (But Effective) Gifting Strategies

In 2013, a married couple could combine their annual exclusion gifts to give up to $28,000 in cash or other assets to each of their loved ones. For example, a couple with 2 children and 4 grandchildren could make combined annual exclusion gifts of $168,000 each year to these 6 fortunate family members, which would allow the benevolent (and astute) donors to transfer $1.68M tax-free to them over 10 years, while still preserving their basic exclusion amount of $1M each in tax-free testamentary transfers. In light of the severe decrease in the basic exclusion amount and the sharp increase in the gift and estate tax rate that will take place in a little more than 2 months, a well-designed and executed annual gifting plan would allow you to transfer significantly more wealth to your loved ones, and pay far less (or nothing) in gift and estate taxes.

Funding a 529 Plan
A 529 Plan is a tax-favored savings account that may be utilized to fund the college education of your child or grandchild, although they may be used to benefit non-family members, too. Any appreciation earned on funds invested in a 529 Plan will not be subject to income tax if used for the beneficiary's qualified higher educational expenses. In addition, a 529 Plan may be front-loaded with up to 5 years worth of annual exclusion gifts (thereby leveraging the benefit of compounded growth), provided that several requirements are met, including the timely filing of a gift tax return. Thus, the opportunity to start making larger annual exclusion gifts in 2013 to a 529 Plan will better enable you to pay for a child's college education when the time comes.

Sophisticated Gifting Strategies


Many of the sophisticated strategies to reduce gift and estate taxes - such as gifting assets to a grantor retained annuity trust (GRAT), selling an asset to an intentionally defective grantor trust (IDGT), or gifting shares in a family limited partnership (FLP) or family limited liability company (FLLC) to your children - are based on leveraging annual exclusion gifts through taking valuation discounts on the underlying assets. Once again, the imminent increase in annual exclusion gifts will amplify the potential benefits of these tax mitigation techniques, which will be even more valuable to all of us when our wealth transfer tax laws are revised radically on January 1. 


Please contact me at 323.654.9513 or to discuss how best to make tax-free or taxable gifts now or in the future, or any other aspect of your current estate plan.


Brooks Paley, J.D., LL.M.

Attorney at Law


About Paley Law Corporation
Paley Law Corporation is based in Los Angeles and specializes in providing personalized, sophisticated estate planning and related legal services. Brooks Paley, J.D., LL.M., is the managing principal of Paley Law. Brooks has been a member in good standing of the State Bar of California since he was admitted in 1993. He is a member of the Trusts and Estates Sections of the State Bar of California, the Los Angeles County Bar Association, and the Beverly Hills Bar Association. Brooks earned his Master of Laws in Taxation with High Distinction at Loyola Law School Los Angeles, his Juris Doctor at the USC Gould School of Law, and his Bachelors Degree at Stanford University.

The above material is provided for general informational purposes only and is not intended to constitute legal advice in any particular matter. Transmission of this material does not create an attorney-client relationship. Paley Law Corporation does not warrant the content of this material and is not responsible for any errors or omissions associated with it.

To ensure compliance with requirements imposed by the Internal Revenue Service, Paley Law Corporation informs you that any U.S. tax advice contained in this communication (including any links to other websites or material) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.


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