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2011 changes in gift tax encourage large-scale giving

The Wall Street Journal recently published an article discussing the recent changes in the federal gift and estate tax system. As the article points out, the changes have led to the most generous estate and gift tax rates since 1931.

Gift tax prevents wealthy people from emptying their estate before death in order to avoid estate taxes. But various factors, including future uncertainty regarding the estate and gift tax system, large current exemptions, various available leverage techniques, and the general absence of state gift taxes all combine in the present to encourage large gifts by wealthy individuals.

For next two years, the gift tax exemption will remain at $5 million for individuals and $10 million for couples, five times lower than the previous exemption amounts. The tax rate on gifts above $5 million is now at 35%, a 20% decrease from the previous rate. Congress also changed the rules on estate taxes, raising the exemption to $5 million and decreasing the rate to 35% for two years. According to the article, the next two years present wealthy people with a unique opportunity to remove many assets from the estate tax system.

The new rates and exemptions are a change from recent years, in which gift tax exemption amounts have been relatively low in comparison to estate tax rates, and have discouraged wealthy individuals from making big gifts.

According to experts, individuals approaching the current exemption amounts may want to consider making gifts, as doing so now would shield assets from future appreciation from taxes. Even for those with less than $4 million in assets, it may be wise to consider making gifts, especially if the exemption amounts drops back down to $1 million, which is the default amount for 2013. It may also be wise to transfer out of one's estate assets that are quickly appreciating.

For those interested in taking advantage of the current regime, there are reasons to act quickly, including the fact that the debt crisis could prompt more tax changes after 2012.

In our next post, we'll continue looking at this issue.

Source: The Wall Street Journal, "The $5 Million Tax Break," Anne Tergesen and Laura Saunders, 29 Jan 2011.

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