Give Now or Pay Later: The Ever-Changing Estate and Gift Tax

By :: December 13th, 2012

For over a decade, the federal estate and gift tax has been in constant flux with its exemption rising, its rates falling, and its near-death experience in 2010 followed by resurrection in a reduced state. Now Congress once again has to decide what to do about these levies, which affect relatively few taxpayers but get an inordinate amount of attention. Calling something the “death tax” will do that.

For a few more weeks, the estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. In January, unless Congress acts, the tax will return to its old pre-2001 self with a $1 million exemption and a 55 percent top rate. That possibility means that the wealthy once again have to decide what to do with their assets.

Of course, Congress can prevent most of this mess. President Obama wants to revert to the 2009 parameters—a $3.5 million exemption and a 45 percent tax rate. Others want make this year’s tax permanent. Some deficit hawks want to let the rate and exemption return to pre-2001 levels to collect needed revenue. And, of course, many people would like the taxes to go away altogether.

The Tax Policy Center, in newly updated tables, shows how different policies would affect the number of estates subject to tax and the amount of revenue the government would collect. If Congress extends this year’s rules, an estimated 3,800 estates—representing less than 0.2 percent of all deaths—would owe taxes totaling just $12 billion in 2013. If the temporary tax cut expires, more than 47,000 estates would pay nearly $38 billion.

While the estate tax has gotten most attention, the gift tax also faces big changes. Since 2010, anyone could give away as much as $5 million worth of assets to other people without owing any gift taxes to Uncle Sam. Married couples could distribute twice that much. If you give away even more, you owe 35 percent in federal gift tax on the excess.

But if Congress doesn’t act over the next few weeks, the exemption will plummet to just $1 million on January 1 and the tax rate will jump to 55 percent. That’s a real incentive to be very generous before the end of the year. Give $5 million to your favorite niece this month and it costs you $5 million. Give her $5 million next month and, barring congressional action, you’ll also have to give Uncle Sam more than $2 million in gift tax.

One advantage of this year’s large gift tax exclusion and low tax rate is that they match the estate tax parameters—you don’t have to die to take advantage of the bargain basement prices for passing on your wealth.

However, giving while you’re still alive has one big disadvantage if you are gifting assets that have appreciated in value. Your gift to your niece comes with your basis—what you paid for the asset. When she sells the asset, she will owe tax on both your capital gain and any appreciation after the gift. If she inherits the asset, your niece will owe capital gains tax only on the gains that occur after your death.

Discussions of the looming fiscal cliff have paid scant attention to estate and gift taxes. But wealthy people might do well to consider being very generous this month and giving very large gifts at today’s bargain tax prices.

5Comments

  1. Michael Bindner  ::  8:05 am on December 14th, 2012:

    The right approach is not asset based but beneficiary based. When you get an asset, how it was previously taxed is really irrelevant to you and whether you should have to pay taxes on it at normal income rates. Tax reform which exempts the first $150,000 a year from taxation (joint filers at current gross wage levels) provides enough of an exemption for most people. After that amount, distributions from estates or gifts should be taxable at normal income rates. If consumption taxes are in place, they will also be effectively collected on such income – which is why those organizations who advocate for low gift taxes also want no part of consumption taxes. Sadly, this is mostly in service of their donor bases.

  2. Justin  ::  8:53 am on December 14th, 2012:

    The donee does receive a carry-over basis, which could expose the donee to capital gain tax if the property is subsequently sold for a gain. However, then the donee is just paying tax on the gain (not the total value of the asset) and is hopefully paying tax at a rate below the estate tax rate. If the choice is pay now on the total value of the asset at a rate of between 35%-55% or pay later on any gain realized at a rate of something less than that, I would elect option b every time. I think the greater risk is for folks giving away more than they can afford or more than makes them feel comfortable.

  3. Gary Reber  ::  1:19 pm on December 14th, 2012:

    The proposed Capital Homestead Act addresses inheritance and gift taxes and other necessary tax reforms. Under the Just Third Way more just and simple tax system, the following is proposed: • Eliminate all tax loopholes and subsidies,
    • Provide an exemption of $100,000 for a family of four to meet their ordinary living needs,

    • Encourage corporations to pay out all their profits as taxable personal incomes to avoid paying corporate income taxes and to finance their growth by issuing new full dividend payout shares for broad-based citizen ownership,

    • Eliminate the payroll tax on workers and their employers, but

    • Pay out of general revenues for all promises for Social Security, Medicare, Medicare, government pensions, health, education, rent and subsistence vouchers for the poor until their new jobs and ownership accumulations provide new incomes to substitute for the taxpayer dollars to fill these needs.

    • The tax rate would be a single rate for all incomes from all sources above the personal exemption levels so that the budget could be balanced automatically and even allow the government to pay off the growing unsustainable long-term debt, but the poor would pay the first dollar over their exemption levels as the hedge fund operator and others now earning billions of dollars from capital gains, dividends, rents and other property incomes which under some tax proposals would be exempted from any taxes.

    • As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.

    • The Federal Reserve would stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and

    • Begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income.

    • The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,

    • The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable goods and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.

    • Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance, but

    • Would not require citizens to reduce their funds for consumption to purchase shares.

    The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on our only legitimate monopoly –– the State –– and whatever elite controls the coercive powers of government.

    Support the Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm

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