Under current governing law, every individual has a $5,120,000 lifetime gift tax exemption, which amounts to a $10,240,000 combined lifetime exemption for married couples. But the current lifetime gift tax exemption amount is scheduled to revert back to $1,000,000 in 2013. That makes the remaining months of 2012 a prime time for Miami residents to take advantage of the current exemption amount by passing assets such as real estate and stock portfolios to heirs gift tax free.
Different Ways to Utilize the Gift Tax Exemption
The simplest way to utilize your lifetime gift tax exemption amount is to make outright gifts, either to family members or other individuals you wish to benefit. Alternatively, such gifts may be made in trust for the primary benefit of any such individual or individuals. According to a recent New York Times article:
For those who do decide to make a substantial gift, there are many different ways to do it. Writing a check is the simplest way, but advisers would tell you that would leave the money unprotected against creditors. 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 share in a private business into a trust.
In addition to the transfer tax benefits, gifting in trust may provide for the protection of such assets from the claims of any future creditors and is useful in circumstances where the recipient is either too young or not capable of properly managing the gifted assets. All future appreciation and income related to the gifted property will avoid taxation in your estate upon your death and potentially in the estate of the recipient to the extent generation-skipping tax exemption is also allocated to the gift.
Intentionally Defective Grantor Trust
Another effective way of leveraging your lifetime gift tax exemption is through the use of an Intentionally Defective Grantor Trust (“Grantor Trust”). Such a trust is structured to be excluded from your estate for Federal estate tax purposes, but owned by you for Federal income tax purposes. While you will continue to be taxed on all income generated by the assets held in the Grantor Trust as though it did not exist (even though the income being generated is retained in the trust for the benefit of your desired beneficiaries), the gifted assets and all future appreciation and income thereon will not be included in your estate upon your death, escaping any estate taxation.
With Miami’s real estate market on the rise, now is a great time to gift real estate assets before they greatly appreciate in value. This will get both the assets and any appreciation thereon outside of your taxable estate.
Further, your payment of any income taxes related to the assets held in the Grantor Trust should not be considered additional gifts to the Grantor Trust, which essentially results in your being able to make additional tax free gifts to your desired beneficiaries.
Depending on your goals and desires, there are also more creative techniques that can be used to further take advantage of the gift-tax exemption opportunity that may exist only until the end of 2012, including personal residence trusts and split-interest trusts.
While it is impossible to predict whether Congress will act to prevent the lifetime gift tax exemption from reverting back to $1,000,000, this opportunity is something that shouldbe considered and discussed with a tax professional.