A couple of you have asked this question recently so I thought I might as well blog on it. One of the provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased the federal gift and estate tax exemption to 5 million for 2011 and 2012. Unless Congress acts, this amount will decrease to 1 million in 2013. So the question is if it is within your means to gift 5 million, should you? And in fact many financial planners and attorneys are advising their clients to do so.
I have to admit that it sounds like a really good idea to me too but I think there might be one little snag. For example, assume an individual dies in 2013; has $2,000,000 in assets at the time of death; and the gift and estate tax exemption has returned to $1,000,000. During 2012, the individual gifted $3,000,000 to which the gift and estate tax exemption was applied. In order to determine the value of the estate for estate tax purposes, the $2,000,000 owned by the individual at death is added to the $3,000,000 of prior gifts, creating a taxable estate of $5,000,000. Estate tax will be calculated on $4,000,000, which is the value of the taxable estate reduced by the gift and estate tax exemption at the time of death. Therefore, the gifted assets actually are subjected to estate tax at death.
This little glitch is being referred to as “claw back” and one would think there will be a technical correction but it will take an act of Congress and Congress is having difficulties passing anything right now and I for one would hate to rely on them to fix this little snag any time soon.