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Gift giving laws may soon change

December 2012

Consider your options for gift giving in 2012 because gift tax laws are expected to be less favorable after this year.

There is no better way to end the year than giving a gift. Whether it comes in the form of a college education, a donation to charity, or an outright gift of cash or property, it is pivotal to not only plan but also comprehend the implications of gift giving. Becoming more familiar with the gift giving process may allow you to reduce the size of your estate and decrease the amount of gift taxes to be owed, all while giving peace of mind to you and your loved ones.

We start this discussion with the basics, which allows us to fully comprehend the entire process of gift taxation. Currently, for the 2012 tax year, an individual may give up to a $13,000 annual gift to a single person. This exclusion can be applied to an unlimited number of individuals, regardless of their relation to you. The annual exclusion can also be increased for couples filing jointly. Each spouse is able to gift $13,000 per person, thus allowing a tax free gift of $26,000 to a single individual. Therefore, if you stay below the annual exclusion of $13,000 per person, per year, there is no need to file the IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return).

What happens if you exceed the annual amount? This is where gifting for 2012 becomes imperative. For 2011 there was a lifetime gift tax exemption of $5 million, or $10 million for married couples. In 2012, this amount will be indexed for inflation raising it to $5,120,000 or $10,240,000 for married couples. This means, in 2012, you are able to give up to $5,120,000 during your lifetime without paying gift taxes. However, this lifetime gift tax exemption is set to revert to $1 million in 2013 with the gift tax rate jumping up to 55%, thus greatly reducing the lifetime exemption amount. Although it is not clear if this reversion is going to occur, to take advantage of the current higher lifetime gift tax exemption be sure your gifts are made during 2012.

Do all gifts count towards your annual and lifetime exclusion? No. Gifts made towards medical expenses paid directly to the medical provider, and educational expenses paid directly to the educational institution are not counted in the exclusion. These payments must be made directly to the institution and not the individual being benefited in order to be excluded from the annual and lifetime exclusion amount.

QTP's - Qualified tuition programs (529 plans) also present a unique opportunity when it comes to gift taxation. Contributions made towards a QTP are currently counted toward the annual exclusion amount. However, you are able to 'front-load' the contribution for up to 5 years. This means you are able to make a gift up to $65,000 per donee towards a QTP and still qualify for the annual exclusion. The gift then fulfills your annual exclusion for that individual for the next 5 years. This is allowed in order for you to take advantage of the tax deferred growth that qualified tuition programs offer. It is important to note that you will still have to file a Form 709 the year of the initial gift, although this will result in no tax.

Another aspect that must be considered with gifts is the cost basis. Cost basis is the value used to assess taxes when the asset is sold. When assets are gifted to an individual they use the cost basis of the donor. Meaning the individual receiving the gift will be taxed using the value of the asset when the donor purchased it. This differs from assets that are inherited through an estate. When an asset is inherited it uses a stepped up basis. A stepped up basis uses the value of the asset at the time of death of the donor. However, when a gifted asset is sold it will be taxed at the capital gains rate which is significantly lower than the estate tax rate for inherited assets.

If you have any further questions, please contact us. Your advisor will be glad to discuss the various aspects of gift giving and how it relates to your personal financial plan. We can also direct you to a legal professional for guidance on the issues as they relate to your unique situation.

For more information on IRS Form 709: http://www.irs.gov/pub/irs-pdf/i709.pdf

-Aaron G Kroll

The above material is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact your attorney or tax advisor to obtain advice with respect to any particular issue or problem. The opinions expressed at or through this article are the opinions of the individual author and may not reflect the opinions of the firm or any individual.