In the calendar year 2012, individuals can give away as much as $5,120,000 without paying federal gift taxes. This amount is reduced by taxable gifts that were made in prior years. The gift tax exemption will decrease to $1 million on January 1, 2013, unless Congress changes this law. President Obama favors the planned reduction to $1 million. 

If you fail to make a gift this year and the exemption reverts to $1 million as scheduled, there are 2 unfavorable consequences. First, you hamper your ability to help your children without paying federal gift taxes. Second, you may owe significantly more estate taxes upon your death or upon the subsequent death of your spouse.

During 2011 and for the first two months of 2012, we have been working with a number of our clients regarding this opportunity. The process involves much more than just writing a check. Among the issues that our clients are grappling with are the following:

  1. Can you afford to make the gift? Said differently, is there a chance that you will run out of money if you make the gift?
  2. Are you prepared to pay Tennessee gift taxes? There are several ways to make gifts without paying Tennessee gift taxes; however, these techniques are often impractical.
  3. What impact will the gift have on your children?
  4. What assets should be given?
  5. Are you willing to give up control of the assets you are transferring?
  6. Should you transfer “discounted” assets such as fractional interests in real estate or interests in corporations, LLCs, or limited partnerships?
  7. Should you make the gift to a trust rather than directly to the recipient? Most of our clients have decided to use a trust.
  8. If you use a trust, what are the provisions regarding trustees and distributions?
  9. If you use a trust, should you allocate generation-skipping transfer tax exemption to the trust? The answer is usually yes.
  10. How will the gift impact your overall estate plan?
  11. When should the gift be made?

Even though our clients have unique circumstances, we have seen patterns emerge as to how they have chosen to deal with these various issues. We will be publishing a series of articles that will hopefully help you to navigate these issues.