Monthly Archive: December 2010

Gift Tax Exemption a Joyous Surprise

What a Christmas present surprise to the American taxpayer we have before us:  President Obama has signed the massive tax cut bill HR 4853 known as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. (Tax Relief Act) On December 15, the Senate passed the compromise package with an 81–19 vote, with large majorities of both Democrats and Republicans supporting it. Close to midnight on December 16, the House passed the bill 277–148.   Not only were all the Bush tax cuts extended for two years, but there were a host of other sweeteners and add ons that will be the subject of much analysis in the next few weeks.  I would like to just focus on one significant add-on: Estate and Gift taxes are now unified for the first time since 2001, and the gift tax exemption is substantially higher.  This one add-on will present a significant shift in tax planning opportunity for many taxpayers.  In fact, taxpayers may be advised by their tax advisors to hold off on any last-minute 2010 gifts in favor of 2011.  Here’s why:

Tax free gifts have generally always been allowed to anyone we want as long as the gift was $13,000 in 2009 or $26,000 for a married couple.  Anything over that was subject to tax when accumulated gifts totaled an amount over the Gift tax exemption, which had been $1,000,000 for singles and $2,000,000 for a married couple since 2002.  The Tax Relief Act increases the gift tax exemption on January 1, 2011 to $5,000,000 for singles and $10,000,000 for a married couple.  This is huge!  Parents whose major asset is the family home, farm or a family business worth $10,000,000 or less can now gift over the bulk of their assets to the kids tax-free.  Gifts made under the Tax Relief Act from January 1, 2011 to December 31, 2012 will be permanently effective even if in 2013 the gift exemption goes back down to $1,000,000.  Did I say this is huge folks?  Concerned about giving up to $10,000,000 to your kids within the next two years, particularly if they are teenagers?   Call your attorney and ask if setting up an irrevocable trust is the right way to keep the funds protected until the kids reach a responsible age.  Did I mention that this would be all tax-free?

But what about those folks who already gave substantial taxable gifts in 2010 ?   You may want to ask your CPA if it is possible to file an amended gift tax return, particularly if the gift was not fully funded yet.  For example, let’s say you created a family limited partnership in 2010 with the sole intent of divesting your estate assets to your children through a series of transactions to take place in the next few years in order to transfer wealth from you and your spouse to your children without incurring substantial gift tax.  I believe for the vast majority of American taxpayers the family limited partnership may be obsolete for at least the next two years due to the Gift Tax Exemption Surprise.   A very merry Christmas indeed to all taxpayers.