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New year to bring changes in estate and gift tax law, P.2

In our previous post, we mentioned that the ever changing gift and estate tax law is set to change again in a couple weeks. Now there is now only a tiny window of time to take advantage of the current very favorable conditions for passing on wealth. Once again, if Congress doesn’t act in the next weeks, the combined estate and gift tax exemption is set to drop from over $5 million with a 35 percent tax on gifts and bequests exceeding that amount, to a $1 million exemption with a top tax rate of 55 percent.

Because of the favorable conditions for passing on wealth, taxpayers have an extra incentive, besides the usual holiday cheer, to be generous over the Christmas season. It is important to keep in mind though, that gifting should be done carefully whenever it is done, so that it fits within an overall smart estate plan.

Those considering last minute gifts should keep in mind that gifting while one is alive has a big disadvantage when the assets have appreciated in value. There is the capital gains tax to contend with. What happens is that the amount paid for the asset-its basis-will become the basis of the person receiving the gift, and the recipient will then have to pay capital gains tax on the appreciated amount when they go on to sell the asset.

Gifting can be a very important part of an overall estate plan. Lifetime giving is an important way of doing this. One can make use of the $13,000 annual gift tax exclusion, as well as the unlimited marital deduction, and education and medical deductions.

It is important to work with an experienced attorney when working gifting into one’s estate planning. Doing so will ensure that the gifting component integrates well with the other aspects of the plan.

Source: Forbes, “Give Now Or Pay Later: Rich Face Dillema With Fate OF Estate And Gift Taxes Up In Air,” Robertson Williams, December 17, 2012