The gift, estate and generation-skipping transfer tax exemptions are currently $5.12 million for transfers made through the end of 2012. Unless Congress takes action otherwise, the exemptions revert back to $1 million in 2013. Before 2011, the gift tax exemption was only $1 million. This means that taxpayers can gift up to $5.12 million, less whatever portion of their exemption they have used in prior years, gift-tax free in 2012. For example, if a taxpayer used his $1 million gift tax exemption in prior years, he would still be able to gift up to $4.12 million in 2012, gift-tax free. The exemptions are $5.12 million per person or $10.24 million per married couple.
Thus, now is an excellent time for taxpayers to consider making gifts. When a taxpayer makes a gift, this not only gets the value of the gifted property out of the taxpayer's estate for estate tax purposes, but it also gets the appreciation on the gifted property out of the taxpayer's estate for estate tax purposes. Plus, this opportunity may be short-lived depending on what happens to the law after 2012. If the exemption amount decreases next year, as it is scheduled to do, taxpayers will have lost an opportunity to pass wealth down to their heirs (or to trusts for their heirs) gift- and estate-tax free.
Many taxpayers may not feel comfortable making large gifts now. Using a trust that can benefit a spouse may give them the comfort they need. However, trusts for spouses can have traps for the unwary. Alternatively, they may want to use at least some of their $5.12 million exemption, or perhaps one spouse may want to use his or her exemption even if the other spouse doesn't use any of his or her exemption.
Taxpayers should carefully consider whether or not to use their gift tax exemptions by making gifts in 2012.