Tax Exemptions: Use it or Lose It!
By: Morris Law Group - March 01, 2012
In the U.S., not only are you taxed on the income you earn during your lifetime, but you are also subject to an estate tax on the assets you own or control at death, called your “gross estate.” If the total value of your gross estate exceeds the exemption in effect at the year of your death, the excess will be taxed at the rate in effect for that year. Currently, each individual has an exemption of $5,120,000 and any excess will be taxed at a rate of 35%. This exemption may be utilized during life by making gifts, or if not used during life, can be used at death. However, after December 31, 2012, the exemption is scheduled to be reduced to $1,000,000 and the estate tax rate is scheduled to increase to 55%.
To illustrate, assume Taxpayer Mike has $2,000,000 in investments and owns another $2,000,000 in life insurance. Mike’s gross estate will amount to $4,000,000 and if he dies after 2012, based on current law, he will be afforded a $1,000,000 exemption. This means that $1,000,000 will pass tax-free to his heirs, but $3,000,000 will be subjected to the estate tax. At a rate of 55%, there will be $1,650,000 of estate taxes due.
Due to the scheduled decrease in the exemption amount, we strongly recommend that clients establish one or more tax saving strategies, making current use of their exemptions, in order to minimize the future estate tax burden.
The simplest method of utilizing your current exemption is by making gifts prior to January 1, 2013. Prior to this date, as the law is written, an individual is afforded a $5,120,000 gift and estate exemption. We've all heard the phrase, “use it or lose it.” As discussed above, after December 31, 2012, the exemption is scheduled to be reduced to $1,000,000. Thus, if gifts are not made prior to this date, up to $4,000,000 in exemptions could be left on the table.
Making a “gift” to remove assets from your gross estate does not necessarily mean giving your heirs current use or control of the asset; rather, qualifying transfers can be made to protective trusts or partnerships can be formed so that you can retain a level of control over the “gifted” asset, while effectively removing its value and future appreciation from your taxable estate. Additionally, if you do not want to make current gifts or if you have already utilized your gifting exemptions, additional techniques are available to reduce the value of your estate at death for estate tax purposes. In this regard, we can help you develop a gifting or other tax-saving strategy designed to fit your particular needs; please contact our office for further information.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.