Gifting to Avoid Estate and Gift Taxes

Going, Going, Gone!
U.S. taxpayers are experiencing a “perfect storm” of opportunity to make tax-free transfers (gifts) of assets such as family businesses, real estate and other wealth from one generation to the next. The gift tax was first enacted in 1932 by the federal government. Over the coming months, we all have what may be the best opportunity since 1932 to gift family assets without a gift tax now and to avoid significant estate taxes later.

Two notable exceptions to the gift tax
Some people are not aware that giving away assets to their children or other individuals may create a taxable event. The “gift tax” referenced above applies to anything of value transferred by one individual to another. There are two notable exceptions to the gift tax. One is an “annual exclusion” which is an exception that allows individuals to gift up to $13,000.00 per year per person without any gift tax consequences.
A second exception is an overall gift tax exemption which historically has been limited to $1M during an individual’s lifetime.

The above-referenced “perfect storm” of opportunity is almost certainly short-term in nature. Several key elements have transpired to create this opportunity as follows:

  • At the conclusion of 2010, Congress changed the estate tax exemption which allows for transfers of gifts up to $5M per individual ($10M per married couple) of assets with no federal gift tax.
  • Asset values, particularly for real estate, are still significantly depressed resulting in a greater opportunity to gift value from one generation to the other. In the State of Michigan, a recent Supreme Court decision also provides a unique opportunity for parents to gift ownership of real estate to their children in such a way that a transfer can avoid a significant increase in future real estate taxes.
  • Certain widely accepted techniques used by experienced estate planning attorneys may also result in individuals transferring 10 to 20 times the $5M or $10M gift tax exemption limit without incurring gift taxes based on certain “leveraging techniques”. Although these techniques can be complex, they are well established and have withstood attacks in the past by the IRS.
  • Most transfers that are made to take advantage of the gift tax exemption also provide significant asset protection for the assets.
  • Many of our Cottage Law clients with family cottages will be able to enjoy long-term tax savings as a result of taking advantage of this opportunity to make tax-free transfers (gifts) of these legacy assets. Visit our Cottage-Law website at for additional information.

An appropriate gifting strategy can save significant taxes
Why act now? Unless Congress and President Obama take further action to create a new law, the 2010 Tax Act will automatically expire at the end of 2012 (approximately 13 months from now). The current lifetime gift tax exclusion of $5M per person will drop to $1M. The window of opportunity for gifting significant assets from one generation to the next to avoid potential future estate tax is narrowing. Gifting assets removes the asset’s value in the transferors estate for estate tax purposes. As a result, an appropriate gifting strategy can save significant taxes.

Reducing future tax burdens
It is a widely accepted belief among financial advisors and other financial experts that taxpayers should transfer assets that are depressed in value that may be subject to future estate tax liability as soon as possible.
As these assets begin to recover and grow in value in the future, so do an individual’s current and future tax burdens.

The possible benefits
Whether you perceive yourself as wealthy or not, given the possible benefits of making gifts of assets and the unique opportunity that currently exists to do so, everyone should at least evaluate their potential future estate tax liability and how current gifts of assets may reduce that liability.

Please contact me if you would like to evaluate your own situation to determine whether gifting assets at this time is right for you.

Dan A. Penning

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