Give It or Lose It- Part II


In last week’s column, I discussed the case of the ninety-three-year-old who was worth $3 million and suggested that he consider giving $2 million to his daughters now under the current law that allows gifts up to $5 million without tax. Next year the estate tax exemption automatically drops from $5 million to $1 million. By doing so, I suggested the family could save more than $1 million in estate taxes should the father die after this year. Estate planning attorney, Ralph Yeilding of Bradley Arant, wrote me to suggest that the father’s $1 million remaining estate would be fully subject to the new 55% estate tax. Yep, I believe Ralph is correct which means the savings to the family will be a bit more than $500,000 rather than the $1 million I suggested.
He further noted there is a technical glitch in the 2010 Tax Act which might give the IRS the ability to ‘claw-back’ the tax savings that resulted from the gifts made. That seems very unlikely to me, and Ralph along with most of the estate planning professionals, think that this uncertainty will be clarified by a technical correction in future tax legislation. Finally, Ralph thought there were better than even odds that Congress will enact legislation next year as part of an omnibus tax bill that will permanently raise the estate tax exemption above $1 million. I, too, am both optimistic and hopeful that Congress will take the necessary action to resolve this in the near future. In recent months, President Obama has suggested that he’d be happy with an estate tax exemption of $3.5 million ($7 million for married couples), while front-runner, Mitt Romney has suggested he’d eliminate the estate tax altogether since it actually raises very little tax revenue.  Unfortunately, Congress’ track record for passing needed legislation in this area is not very good. The estate tax has been in a state of flux for nearly a decade, making it almost impossible to effectively plan one’s estate over the long term. Everyone thought that Congress would take action in 2010 to make certain that estate taxes were not eliminated as scheduled under the law. Yet their failure to take action meant that no one who died in 2010 owed any estate tax, including several high-profile billionaires. The result was billions in lost revenue for the federal government. 
It also seems unlikely that Congress will pass estate tax legislation during what is expected to be a highly contested presidential election year. This means it’s likely that 2013 will roll around and the estate tax exemption will, in fact, drop to $1 million. What we are then counting on is that sometime during 2013, Congress will enact legislation raising the exemption and make the new law effective retroactively back to January 1, 2013. For a Congress that has a near-term history of ineptness, this may be a lot to hope for.
The purpose of last week’s and this week’s column is to strongly suggest that those of you with multimillion-dollar estates get with your estate attorney or financial advisor this year for a review. No one is certain what next year will bring but what we do know is that for 2012, you can give away up to $5 million and pay no gift taxes. If you’re interested in reducing estate taxes, this year may be one of your best opportunities.