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The Cost of Making Gifts After January 1, 2013 Will Increase
Dramatically
The next six months provide a short window of opportunity to
make substantial gifts without incurring any gift tax. The Federal
gift tax exemption is currently $5,120,000, enabling an individual
to make aggregate lifetime gifts up to that amount without
incurring gift tax (and twice that amount for a married couple).
Unless Congress acts, on January 1, 2013, the Federal gift tax
exemption will decrease to $1,000,000, and the maximum Federal gift
tax rate on gifts in excess of that amount will rise from 35% to
55%, significantly increasing the cost of making gifts. Similar
changes to the Federal generation-skipping transfer
("GST") tax rate and exemption will significantly
increase the cost of gifts to grandchildren and more remote
descendants.
In light of these pending changes, we recommend that you
consider making gifts before year-end. By making gifts now, you can
remove property from your estate, including any future appreciation
on the property, and avoid estate tax on that property at your
death. Gifts can be made outright or in trust and can be funded
with a variety of assets, including cash, public or private
securities, real estate and personal property such as art and
jewelry. There are a number of techniques that can be used to
structure gifts in order to preserve flexibility and control and to
maximize tax advantages. For example, a donor can establish a
"dynasty trust" to benefit multiple generations, with the
potential to avoid transfer tax in perpetuity. To preserve
flexibility, a married couple can set up a trust of which one
spouse is a beneficiary. A donor with limited liquidity can
consider creating a trust that holds a residence or valuable
art.
Historically Low Interest Rates Make GRATs and Intra-Family
Loans Highly Attractive
Interest rates are at historical lows. Consequently, it is a
particularly desirable time to create grantor retained annuity
trusts ("GRATs") and to make or refinance intra-family
loans.
"GRATs: In a GRAT, the donor transfers assets to a
trust and retains the right to receive an annual payment from the
trust for a period of years. If the assets in the GRAT appreciate
at a rate greater than the so-called hurdle rate, the excess
appreciation will pass to the donor's beneficiaries free of
gift tax when the trust terminates. The "hurdle rate" is
published monthly by the Federal government. The hurdle rate for
July is 1.2%, which is at a historical low. For donors who are
charitably inclined, the low hurdle rate also makes charitable lead
annuity trusts ("CLATs") highly attractive."
Intra-Family Loans: By making a loan, you can provide a
family member or family trust with funds at a low interest rate.
The minimum interest rate that you can charge without having the
foregone interest be considered a gift is published monthly by the
Federal government. For July, the minimum annual interest rate
applicable to an intra-family loan with a nine year term is 0.92%,
which is at a historical low.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.
A state cannot include income in the apportionable base and then exclude the receipts and related factors that generated that very same income from the apportionment formula.
