Gift and Estate Tax Changes

Focusing on the Future: A Look at Gift and Estate Tax Changes
Written by: Blake Godwin and Todd A. Jones

This article discusses the changes that have been implemented into the current Gift and Estate Tax laws in the United States that everyone should know about.

Let’s start off with a brief overview of the Unified Gift and Estate Tax system in the United States. First, it is important to understand the differences between a gift tax and an estate tax. The major difference between the two is the timing of the property transfer. A gift tax is imposed on the donor when the gift is transferred during the donor’s lifetime. On the other hand, an estate tax is a tax imposed on the transfer of the “taxable estate” upon a person’s death. Second, there are several exemptions that donors can take advantage of to avoid paying taxes on their gifts.

The gift tax law changed late in 2010 as a result of Congress modifying some of the Bush-era tax credits. The changes give people the chance to transfer more of their wealth without negative tax implications. The current gift tax law increases a donor’s lifetime exclusion exemption amount from $3 million to $5 million. The current law also lowers the tax percentage for any amount over $5 million from 55% to 35%. For example, if a donor decides to pass $9 million as a gift, he or she would only have to pay taxes on $4 million (the amount over the lifetime exclusion). At the current lower rate of 35% the donor would be required to pay $1.4 million in taxes. Even though that is a lot of money, it is significantly less than the 55% tax, or $2.2 million, that was required under the previous law. A married couple could receive the full $9 million gift because together they would be under their lifetime exclusion. The second exemption under current gift tax law allows a donor to pass down $13,000 annually to as many beneficiaries as desired without the gifts being taxed or counting against their lifetime exclusion.

This current version of the Gift and Estate Tax Law will only be effective until the end of 2012. At that time, the lifetime gift tax exclusion is expected to go back to its previous limit of $1 million, with any amount over that to be taxed at 55%. With the current higher lifetime gift tax exclusion, the time is ripe to make large gift transfers. Also, with the tax percentage at its lowest point in years (35%), people that have already exceeded their lifetime exclusion limit would be benefited to take advantage of the current lower tax percentage.

If you have any questions about this or other related issues, please contact Todd Jones with Anderson Jones, PLLC at (919) 277-2541 or by email.