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Don't Miss Out on Taking Advantage of the Gift Tax Exemption

If you're considering taking advantage of the gift tax exemption as part of your estate planning, you should be aware that the current $5.12 million break might expire at the end of the year.

In 2010, Congress and President Obama agreed upon the $5 million gift tax exemption, and that amount was increased this year to account for inflation. Previous to 2010, the tax exemption was $1 million, and it is unclear what will happen when the 2010 provision expires. It should be noted that this exemption is separate from the annual $13,000 gift exclusion.

Several factors should be considered when deciding if and how to proceed with this exemption. First of all, it is important to determine whether you will have enough money to meet your own expenses once you give your gift. It is also valuable to remember that all financial determinations should be based on more than simply saving on taxes. Who you give your gift to is also significant since a substantial gift to a child will grow much more over time than one to an adult.

If you do decide to use the gift tax exemption, there are numerous ways to proceed. Generally, gifting by the use of a simple check is the least desirable since that leaves the funds vulnerable to creditors and does not take advantage of ways to multiply the value. If you are not concerned about the liquidity of the gift, trust funds might be a viable choice. Other options include moving real estate or a share in a business into trusts.

Deciding which option is best for you can be a complicated process, and anyone making such a transfer must be certain that her gift is irrevocable, otherwise it will not qualify under the Internal Revenue Service guidelines. Additionally, if you are debating whether to make such a gift, be aware that time is short-it can take three months or more to set up a gift of this value.

Source: New York Times, "To Give or Not to Give, Up to $5.12 Million," Paul Sullivan, June 22, 2012

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