The $5 Million Gift in 2012 – An Unprecedented Opportunity

August 7, 2012

When Congress set the estate tax rates for 2011 and 2012, they gave wealthy families an opportunity of a lifetime. To understand this opportunity, let’s jump back a few years and see where we have come. In 2001, the Bush tax cuts went into effect and estate taxes went from $675,000 in 2001 to $3.5 million in 2009. There was no estate tax in 2010. The gift-tax exclusion, meanwhile, started in 2001 at $675,000 and went to $1 million in 2002 and has been the same every year thereafter. The tax rates applied on amounts in excess of these figures gradually lowered from 55% to 45% in 2009 and the gift tax fell even further in 2010 to 35%. In the current year 2012 the estate and gift exclusions and tax rates are $5.12 million and 35%. (See charts)


What all this means is that there has never been a better time to transfer assets and the appreciation of those assets out of your estate while you are alive by making a gift. With land prices reaching record highs, many farm families have accumulated many assets without realizing they need more estate planning.

Advantages of Gifts
The advantages to gifting are that they eliminate assets from your estate and eliminate the possibility that these assets will appreciate as part of your taxable estate, both of which will reduce your estate’s tax liability. The gift will also shift any post gift income out of your taxable estate as well. The gifts can also be very helpful to the recipients in receiving an education, buying a home, starting a business, or other worthwhile pursuits. The trust can enable you to actually create rules for the specific use of funds. Lastly, the donor gets the added benefit of seeing the money used by loved ones and enjoying the good feelings of giving.

How to Make the Gift
The gift can either be made as a direct or outright gift to someone or the gift can also be made in a trust.

In our Spring 2012 newsletter we featured an article talking about dynasty trusts, which would be a vehicle you could use when making your gift. A dynasty trust will benefit multiple generations and none of the trust assets are included in the beneficiary’s estate. If the Generation Skipping Transfer Tax (GST) is applied to the dynasty trust, which in 2012 is also $5 million, then they dynasty trust will pass tax free to all and skip generations as well for grandchildren, great-grandchildren or any other person more than 37.5 yrs younger than the grantor.

A few more advantages to using a trust versus an outright gift is having creditor protection, divorce protection, special needs protection, and having spendthrift provisions built into the trust to protect the assets. Other methods you could use to make the gift may also include Family Limited Partnerships (FLPs), Grantor Retained Annuity Trust (GRATs) or Irrevocable Life Insurance Trust (ILITs).

Political Proposals
Since 2012 is a major election year, we have seen possible proposal from both President Obama and Republican Candidate Mitt Romney. With the Obama Proposal, we would see a reversion of the estate and gift tax rates and exemptions back to the 2009 levels. Effective January 1, 2013, the maximum tax rate would be back to 45 percent. The lifetime exemptions would be back to $3.5 million for estate and generation-skipping transfer (GST) purposes while the gift tax lifetime exemption would be reduced to $1 million. The rollback of the estate, GST and gift tax lifetime exemptions would be made permanent. The impact of this proposal is very significant and makes a large case for using the exemption to its fullest ability this year. The reduction of the gift tax exclusion from the current exemption of $5.12 million to the proposed $1 million exemption in 2013 would result in a lost gift tax savings opportunity of $1,828,780.

On the other side, Mitt Romney’s plan would be to work to eliminate the tax permanently. Romney believes the estate tax is a detriment to those that are saving, investing, and creating wealth and jobs. Because we don’t know which proposal will be implemented, it is imperative that an individual uses full advantage of the $5 million exemption this year if he or she is able to.

We realize there are a lot of things to consider when looking at making a gift to take advantage of our favorable gift tax exemptions. This can be a very big decision; however if a person doesn’t look at all of their options during 2012, it may be very costly.

The Trust experts at Home Federal Bank would be glad to visit with you to discuss your specific options when it comes to this important estate planning piece. This opportunity may not come again in our lifetime, so please contact us soon to discuss which option may be best suited for you and your family.

Kristi Metzger, VP & Trust Manager, Home Federal Bank
Robbie Arend, Trust Officer, Home Federal Bank
(605) 333-7579

This summary is provided by Home Federal Bank for informational purposes only. Please consult your Home Federal Trust professional to discuss your personal planning objectives.

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