Gifting may make cents
It was good news last December when Congress passed a generous estate tax exemption. The bad news was that the gift was only a temporary extension, set to expire again December 31, 2012.
This lack of permanency in the tax law complicates long-term planning.
“We like to know the rules, and we like for lawmakers to leave these rules in place so we can make a reasonable plan,” says Roger McEowen, professor and director of the Iowa State University Center for Agricultural Law and Taxation in Ames.
“The uncertainty makes you want to pull your hair out from an estate-planning standpoint,” he says.
In 2009, the estate tax exemption had increased to $3.5 million. “Then the estate tax went away for deaths in 2010,” McEowen says. “The new law let executors of 2010 estates elect to opt for the prior rules or use the new rules.”
The law passed last year offers estates a unified federal estate and gift tax credit of $5 million. Estates worth more than that amount are taxed at a 35% rate.
The $5 million can be used to give gifts during life or to offset estate taxes at death. “It's likely that gift-giving will decrease in 2011 and 2012,” McEowen says. “Some people are gun-shy about making substantial gifts before 2012. They're reluctant until they know what the law will be in 2013.”
It isn't easy to reverse gifting decisions. “You can make a change, but only if you do it during the same tax year,” he says.
But McEowen points out that reducing estate taxes is not the only reason to make gifts. “A gift has other purposes, such as bringing in a family member before the owner is gone,” he says.
Another key feature of the new tax law is that for deaths in 2011 and 2012, the $5 million estate tax exemption is portable between spouses. Any unused portion at the death of the first spouse may be carried over into the surviving spouse's estate and added to the $5 million exemption.
But to gain portability, the executor has to make this election in the first estate.
“The form is not available yet, and it's possible a lot of people may miss it,” McEowen says.
Portability doesn't apply to gift taxes. But the new law reinstates the stepped-up income tax basis on inherited property.
If assets are gifted during life, the donee must take the owner's income tax basis. If the original owner dies holding these assets, then heirs get the fair market basis at the time of death. “It doesn't matter to the decedent's estate, but it will matter to the recipient if he or she decides to sell,” McEowen says.
He encourages families to form an adviser team of legal, accounting, insurance, and financial planning professionals.
“One attorney may not have the expertise to handle it all,” he says. An agricultural background is key. “Your attorney needs to understand the impact of FSA payment limitation rules and other government program rules on your plan,” he says. “Your plan should not be so complex that you don't understand it. Once it's in place, it has to be monitored as the law changes. You need to get with your advisers and ask if your plan still works and if it will still carry out your wishes.”