The federal gift and estate exclusion for 2012 has increased from $5,000,000 in 2011 to $5,120,000 as an inflation-adjustment. This provides taxpayers with a temporary increase in the lifetime gift, estate, and generation-skipping transfer (“GST”) tax exclusion amount while the tax rate remains the same at 35%. Under the current law, an individual can transfer $5,120,000 in assets either during their life or at death free of estate and gift tax liability. Married couples can aggregate this exclusion amount up to a $10,240,000 tax free exclusion. However, the benefit of this exclusion is set to expire by the end of this year.

You can take advantage of the current gift exemption in several ways, including making direct gifts, gifting partial interests in family investment companies, or creating certain types of trusts. Absent Congressional legislative action, the last day taxpayers will enjoy the benefit of the current gift and estate tax exclusion will be December 31, 2012. Starting January 1, 2013, the federal exemption for gift and estate taxes will be reduced to $1,000,000 for individuals and $2,000,000 million for married couples. There are some efforts in Congress to reduce the exemption prior to January 1, 2013. To further increase the burden on taxpayers, the applicable gift and estate tax rates dramatically increase from 35% in 2012 to 55% in 2013. As a result, taxpayers will see a significantly lower exclusion amount with increased tax rates.

January 1, 2013 also marks the start of higher capital gains and dividend rates. In 2012, the capital gains and qualified dividend tax rates have a 15% ceiling. In 2013, capital gains tax rates are scheduled to increase to 20% and qualified dividends are set to increase to a top rate of 39.6%, which is the same rate as ordinary dividend and ordinary income tax rates.

Given the changes on the horizon, taxpayers should consider reevaluating their current estate plans to ensure maximum gift and estate tax savings while still meeting their estate planning objectives.

Should you have any questions or wish to discuss your estate planning goals in this regard, please do not hesitate to call us.