Use it - Don't Lose it: $5.12 Million Lifetime Gift Exemption Set to Expire


Volume 2 • Issue 6 • June 2012

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning and business planning issues.  This month's issue will discuss using the lifetime gift tax exemption. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

In December 2010 President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act"). Unfortunately, the 2010 Tax Act was temporary and is set to expire on December 31, 2012. If Congress allows the 2010 Tax Act to "sunset" the current $5.12 million gift, estate, and generation-skipping tax exemptions will revert to the prior level of $1 million. While the possibility exists that Congress will act and extend the 2010 Tax Act, you should consider acting now to avoid missing an incredible planning opportunity that exists using the lifetime gift tax exemption.

The Lifetime Gift Tax Exemption. The lifetime gift tax exemption is the amount of non-charitable gifts a person can give away over his/her lifetime to any number of people without paying a gift tax. These gifts will also reduce the amount of available estate tax exemption at death.

The Annual Exclusion. You can currently transfer up to $13,000 per year, per person, to anyone without incurring gift tax or using any of your lifetime gift tax exemption. This is known as an annual exclusion gift. A married couple can give twice that amount, or $26,000 per person, per year. Medical care and tuition paid to assist family members or any other individual may be made in addition to the annual exclusion gifts. As long as the gifts are made directly to the medical facility or educational institution, donors can exceed the $13,000 annual exclusion amount without using their lifetime gift tax exemption or the imposition of gift taxes. Annual exclusion gifts are often insufficient by themselves to accomplish estate planning goals. One common way to reduce the potential burden of future estate taxes is to make lifetime gifts using all or a portion of the lifetime gift exemption.

Benefits of Using the Lifetime Gift Tax Exemption Now. At the current exemption level, the first $5.12 million of lifetime gifts in excess of annual exclusion gifts, while requiring the filing of a gift tax return, do not result in the payment of taxes. Under current law starting January 1, 2013 the exempt amount reverts to only $1 million. Gifts in excess of the exemption amount will result in the payment of taxes. The 2012 rate is 35%, but with the decrease in the exemption also comes and increase in the rate to 55%. This means that currently an individual could remove up to $5.12 million in value from his/her estate (a couple could remove up to $10.24 million) without paying any gift tax on the gift.

It is important to remember it is not just about what the gift is now, but what the gift will become. Ideally you will gift assets with the greatest potential for appreciation. If the value of the gifted asset grows that value will also be outside of the estate for estate tax purposes. For example, if you make a gift of an asset worth $1 million today and the value of that asset appreciates to $4 million over your lifetime - the entire $4 million is now outside of your estate for determining estate taxes. Therefore, the net result of the current $1 million gift is the reduction of your estate by $4 million or a potential tax savings of $2.2 million.

Gifting Options. While an outright gift to another individual is an obvious solution, it has risks. The gift may be squandered by the recipient or you may still desire an income stream from the asset. A better solution can be a gift into an irrevocable trust that provides control over how the gifted property can be used and protects the asset from the creditors of the recipient. Additionally, gifts to an irrevocable trust, such as a GRAT or a QPRT, can be structured to provide an income stream. Gifts into a life insurance trust can allow for the removal of the future value of a life insurance policy from the estate. While a $1 million policy is not problematic today, it certainly creates a problem if the estate tax exemption levels revert to $1 million. As with all estate planning many tools exist, using the right one is important.


While Congress may ultimately determine to extend or make permanent the $5.12 million exemption a wait and see approach is unwise. Certainly in an election year it is unlikely anything will occur prior to the November 6 general election. Even though it is only June for many strategies it is already late in the game. A plan will need to be developed, appraisals and/or valuations obtained, legal documents drafted all of which will make it a sprint to make it before the end of the year.

If you had previously used your entire lifetime gift exemption when it was only $1 million, you have an opportunity to do more. If your estate is in excess of $5 million you should absolutely be investigating this strategy. Even if your estate is smaller you may still benefit. But, don’t wait. If you don’t use it, you just might lose it.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.