Knowledge Center

Tuesday, October 16, 2012

Use It or Lose It: Unprecedented Gift Tax Exemption Expires at Year-End

Real Estate Group Bulletin sent on Tuesday, October 16, 2012.

If you own valuable real estate or other valuable assets, you should consider making a gift to your children before year end to take advantage of this year's unprecedented gift tax exemption. Effective January 1, 2013, the current gift tax exemption of $5,120,000 ($10,240,000 for married couples) expires, at which point the gift tax exemption will revert to $1,000,000 ($2,000,000 for married couples).

When comparing a gift made in 2012 to the same gift made in 2013, the difference in federal gift tax liability is sizeable. By way of example, a gift of $5,000,000 made by an unmarried individual in 2012 (assuming the individual has use of the full exemption amount) would result in zero gift tax liability. In 2013, that same $5,000,000 gift would result in a gift tax liability of $2,045,000.

Gifts can be in the nature of property, cash, interests in entities or other assets. Gifts of interests in entities that own real estate or other assets are particularly attractive for gifting as the value of these interests may be discounted for gift tax purposes due to restrictions on transfer, lack of control or limited liquidity.

By making a gift, any appreciation in the gifted asset will grow outside of your estate, and will not be subject to estate tax upon your death. Moreover, gifting provides asset protection benefits as gifted assets are no longer subject to attack from creditors of the individual making the gift.

To take advantage of this year's unprecedented gift tax exemption, all gifts must be completed by December 31, 2012. You are encouraged to act immediately as coordination with third parties (such as appraisers and accountants) may be necessary or advisable. If you are interested in making a gift in 2012, you should contact your relationship attorney at Horwood Marcus & Berk Chartered or any attorney in the Real Estate Group.

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