When Should You Make Your $5 Million Gift?

Everyone’s lifetime gift tax exemption increased significantly this year. Several of our clients who plan to take advantage of this opportunity have already made their $5 million gift.

Other clients are taking their time and considering their options before making their gift. Some have given $440,000 and plan to give the rest in 2012. The reason for a gift of $440,000 is because this is the amount above which the rate of Tennessee gift taxes increases from 7.5% to 9.5%. If you are planning to give more than $440,000, you should consider splitting the gift between 2011 and 2012 in order to minimize Tennessee gift taxes.

One of our clients has become concerned about the political rhetoric regarding a potential repeal of the Bush-era tax cuts for millionaires. To my knowledge, this rhetoric has not been specifically directed to the $5 million gift tax exemption. However, President Obama’s plan to reduce our deficit proposes a return of the estate tax exemption to 2009 levels in 2013. In 2009, the gift tax exemption was only $1 million.

If the President’s plan gains traction, it could be passed with an earlier effective date. There is some possibility, albeit remote, that the $5 million gift tax exemption will not stay in place until December 31, 2012.

Our client had planned to make a gift of $440,000 in 2011 and $4,680,000 in 2012. You will notice that the two gifts add up to $5,120,000. There is a CPI inflator on the $5 million gift tax exemption for 2012. The official number will be announced later this year; however, based upon inflation that has occurred to date, the exemption has been estimated to rise to $5,120,000 for 2012.

Our client has decided to reverse the gifts and make a gift of $4,680,000 in October of 2011 and $440,000 on January 1, 2012. Our client will still get the benefit of running up the Tennessee gift tax rate brackets twice. Our client is taking the risk that any change to the gift tax exemption that occurs during 2012 will not be made retroactive.

The one negative from accelerating the majority of the gift tax to 2011 is that our client will be required to pay the majority of the Tennessee gift tax on April 15, 2012, rather than April 15, 2013. Accelerating the payment of approximately $430,000 in gift taxes by one year will cost the interest that could have earned between April 15, 2012 and April 15, 2013. Since interest rates being paid on fixed-income investments are so low right now, our client has decided that accelerating the payment of the Tennessee gift tax is cheap insurance against a potential law change.

If you know that you want to make a $5 million gift prior to December 31, 2012, you should consider accelerating a substantial portion of the gift to 2011. In addition to hedging against a potential adverse law change, accelerating the gift could have other benefits. If you choose to make a gift of an asset with depressed values, such as real estate or stock, the asset might appreciate in value, which would enhance the value of the gift.

Other benefits from accelerating the gift include income from the property as well as your payment of income taxes on the income. Once you make the gift, income from the gift will belong to your donee. Almost all of our clients who are making large gifts are making the gifts to a grantor trust. This means that the donor will continue to pay income tax on the income from the gift even though they will not receive the income. Paying income tax on income that you do not receive further reduces your taxable estate.

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