The clock is winding down on what BusinessWeek calls an “unprecedented opportunity” to transfer wealth among family members. The ability to transfer as much as $5.12 million in assets tax-free is set to close on December 31, and with that an opportunity for wealthy individuals to share assets and save millions in taxes.
Writes BusinessWeek: Legislation enacted in 2010, which raised the lifetime gift-tax exclusion to $5 million from $1 million for each person starting last year, is set to expire. For 2012, the inflation-adjusted figure is $5.12 million for each person. It will drop to $1 million on Jan. 1 unless Congress acts.
Money or property given while alive may be subject to the gift tax, and wealth transferred at death may incur levies applied to estates, according to the Internal Revenue Service. Under current law, an estimated 3,300 households may have to pay estate taxes this year, according to the Washington-based Tax Policy Center. The figure would increase to about 52,500 estates next year if the exemption drops to $1 million, data from the nonpartisan research group show.
With the tax break set to expire, Dallas attorney Dan Baucum of Dallas-based Shackelford Melton & McKinley says the well-to-do are turning to exotic techniques in a last-ditch effort to protect their investments from the looming tax uncertainty. "Some families have tried to delay the inevitable death tax through provisions in their Last Will and Testament documents, and a few have created 'Family Limited Partnerships,'" says Baucum, a former special assistant to the IRS associate chief counsel. But for those with working assets, such as a family farm or business, these options won't work. Instead, they are opting for a "Defective Grantor Trust" where parents make a seed gift or sale to a trust with special terms that treat themselves as the owners. This gives them control, but gifts future appreciation to their heirs. "Generally speaking, property values are at or near their all-time lows. If you're going to 'sell or gift' to your heirs, now may be the time to do it," he adds.