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Gift Tax Exclusion Increase Means New Planning Opportunities

There have been several changes to Gift Tax laws that increase your ability to “gift” assets, tax free, to relatives and others. Have you used gifting in the past as an estate planning tool? Have you reached the maximum lifetime exclusion of $1M? If so, you will be delighted to know that the Tax Relief Act of 2010 has created new gifting opportunities for you and your family. In particular for 2011 and 2012, the gift tax rate has been reduced, the lifetime exclusion amount was increased to $5M and spousal portability is now permitted. For many taxpayers these changes create the ideal situation for revisiting their gifting strategy.

Key Point: Changes to the gifting rules and tax rate has created a limited opportunity to gift more assets than ever before. Hayashi & Wayland wants you to know that timing is essential as these incentives are set to expire at the end of 2012!

Gift Tax Changes Effective for 2011-2012

There were several important changes to the gift tax rules made at the end of 2010. These changes include:

1. Increased Lifetime Exclusion. The gift tax exclusion amount for 2011 and 2012 is increased from $1M to $5M for individuals. Married couples are permitted to pool their exclusions together for a lifetime exclusion amount of $10M. For those who have already used the $1M gift tax exclusion this change is especially important. It means they will still be able to gift an additional $4M between 2011 and 2012 without incurring any gift taxes. The increased exclusion amount also applies to generation skipping transfers you may be planning to make in 2011 or 2012. 
2. Reduced Gift Tax Rate. The gift tax rates were reduced from 45% to 35% for 2011 and 2012. This is a significant rate decrease and provides the opportunity for those who have exceeded the lifetime maximum to pay a lower effective gift tax rate.  In 2013 the Gift Tax rate is expected to increase to 55%, should the current rate be allowed to sunset as scheduled
3.  Indexed for Inflation. Beginning in 2012, the lifetime exemption will be indexed for inflation allowing for incremental increases not previously available.
4. Portability. For individuals who pass away in 2011 and 2012, the decedent’s unused estate and gift tax exclusion will be portable if an executor files a timely Form 706 estate tax return. This means that a surviving spouse, under current law, can now use the remaining amount of the decedent spouse’s lifetime exclusion plus their own during life or at their subsequent death. Note that portability has only been adopted on the federal level and not on the state level, so there may still be related state tax issues. There is also a possibility that the portability exclusion rules will not be extended beyond 2012. 

What Can Be Gifted? 

The new gift tax rules mean many individuals and married couples should review their current gifting strategies. Gifts in excess on the annual exclusion amount of $13,000 are reportable each year on a Form 709 gift tax return. Even though the excess is reported as a taxable gift, no gift tax is actually payable until your cumulative gifts exceed the $5M exclusion amount. As a reminder, we have provided a partial list of items that can be gifted and who is eligible to receive gifts.  These include:           

• 529 Plan Contributions. Taxpayers are permitted to make contributions to an individual’s 529 savings plan, but the $13,000 annual exclusion limit applies. If you want to contribute a larger amount you may contribute up to $65,000 in one year and not have it treated as a taxable gift. However, it is important to note, that will use up your annual gift tax exclusion of the 529 plan for five years. Any additional gifts during the five year period to the 529 plan will be reportable as taxable gifts.
• Education Expenses. There is no gift tax on gifts made for another individual’s education as long as it is for tuition only and the payments must be made directly to the educational institution (grade school, high school or university). Expenses such as lab fees, room and board, books, computers and software on the other hand would be subject to the annual $13,000 exclusion.
•  Medical Expenses. There is no gift tax on gifts made for medical expenses. Medical expenses are defined as doctor fees, hospital fees, qualified long-term care services and insurance expenses. Payments need to be made directly to the healthcare provider and cannot be directed to an individual to pay the healthcare provider. There is no limit on the amount you can gift for medical expenses.
• Charitable Gifts. There is no limit on the amount that you can gift to charity. However, the income tax regulations may affect the amounts you can deduct on your personal income tax returns in any given year. A gift made directly from a taxable retirement account to a charity can be a very effective strategy for income tax and estate planning reasons.
• Spouses. Except for a few limited exceptions, you may gift an unlimited amount to your spouse and still not be required to file a gift tax return.
• Automobiles/Boats/RVs. You can gift someone an automobile, boat or RV, but if the fair market value is greater than $13,000 you will be required to report it as a taxable gift.
• Bank Accounts. Unlike securities accounts if you add someone’s name to a bank account (checking, savings, etc.), it is not recognized as a gift unless that person make a withdrawal from the account. If the amount exceeds $13,000 in a year you are required to report the withdrawal as a gift on a gift tax return.
• Real Estate. If you make a gift of interest in real property. If the interest has a fair market value in excess of $13,000, you will need to report the gift by filing a gift tax return.

Remember that there is no limit to the amount of people you can gift to in a single year, and it is not limited to only relatives. You can gift to as many people as you would like in a single year and avoid any gift tax provided that each donee’s gift is under $13,000. When reportable gifts exceed the annual exclusion amount, a taxpayer must file a Form 709 gift tax return by the due date of their personal income tax return. In some cases, you may also be required to obtain a qualified appraisal to substantiate the value of the gifted item.

Strategic Planning

The enhanced gift tax rules provide a new and effective tool in gift and estate planning. These changes will have a significant impact on how, when and which gifts are made over the next two years. The reduced gift tax rate, combined with the increased lifetime exemption and the current depressed value of assets creates an atmosphere favorable to making taxable gifts prior to January 1, 2013.

Contact Us
The increased lifetime exclusion and reduced gift tax rate through 2013 provide a limited opportunity to make tax saving moves.  Unsure how the gift tax changes affect you? For additional information, please contact Jim Stiles, CPA, at 831.759.6300 or email at JamesS@hw-cpa.com.