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Taking Advantage of the Current Federal Gift-Tax Exemption as Part of Your Estate Plan

The federal government’s $5.12 million lifetimes gift-tax exemption for individuals and $10.24 million exemption for married couples is currently scheduled to return to $1 million and $2 million, respectively, at the end of 2012. In anticipation of this decrease, it may be a good idea for some Americans to use this dwindling opportunity to clean up both their financial houses and estate plans. By making gifts to your loved ones now, you will have more leeway and a greater ability to avoid higher estate taxes in the future.

Many individuals are choosing to take advantage of the increased exemption to forgive loans to relatives, make specific gifts to their children or grandchildren, share an interest in a family company, or establish an irrevocable trust. In the past, when families reached the previous lifetime gift-tax exemption limits they would often make low-interest loans in order to continue transferring assets to children and other relatives. By formally forgiving such loans before the increased exemption limits expire, a wealthy parent may have the ability to wipe the balance sheet clean. In order to ensure the Internal Revenue Service does not attempt to claim the loan was actually a gift at the time it was made, a taxpayer should be careful give the borrower money in 2012 and allow the borrower to use that money to pay back the previous loan. By doing this, a gift-giver can also protect children or other relatives from paying any income tax on a forgiven debt.

For many wealthy families, a parent or grandparent may have spent unequal amounts on their children’s weddings, educations, homes, or other expenses over their lifetime. Even well-intentioned gift-givers may fail to consider that providing each child or grandchild with an equal annual gift can create a disparity for no reason other than age differences among relatives. Oftentimes, a grandparent will choose to provide each grandchild with an equal annual gift such as $13,000 per year, the maximum amount that may be transferred at this time without contributing to lifetime gift-tax exemption limits. By doing so, the grandparent may feel they are being fair yet fail to consider that one grandchild is ten years younger and received a much lower cumulative gift. Some individuals may choose to use the 2012 gift-tax exemption limits to address such disparities and avoid later conflicts.

The current gift-tax exemption combined with valuation discounts for minority shareholders in a company may make this an ideal time to transfer portions of a family business. Since officials from the United States Treasury have reportedly suggested valuation discounts should be discontinued, now might be an excellent time to use them. Finally, would-be gift-givers may also choose to create an irrevocable trust to benefit a spouse, children, or grandchildren. Contact our knowledgeable estate planning attorneys to discuss how you can take full advantage of the current lifetime gift-tax exemption before it is too late.

The experienced attorneys at Krause Donovan Estate Law Partners, LLC, assist clients with all of their estate planning needs. To request an estate planning consultation, submit our online form. At Krause Donovan, we only deal with probate matters, health care documents, trusts, powers of attorney, wills, and a wide variety of other estate planning tools.

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