The Clock is Ticking on the Expiration of the $5.12 Million Generation Skipping Tax Exemption

On December 31, 2012, the Generation Skipping Tax exemption of $ 5.12 million will expire as part of the end of the "Bush Tax Cuts." For estates having a net value of $ 5,120,000 or less for decedents dying in 2012 there will not be a federal estate tax. The Generation Skipping Tax ("GST") exemption allows individuals regardless of the size of their estate to make gifts during their lifetime of up to $ 5,120,000 before December 31, 2012 without incurring a gift tax. Prior taxable gifts need to be deducted to properly determine the unused amount of your $ 5.12 million exemption. This tax exemption for lifetime gifts is in addition to, and does not include smaller annual gift tax exemptions of up to $ 13,000 annually or certain direct gift payments to educational institutions or healthcare providers, that are excluded under a separate exclusions. The increased GST exemption permits these gifts to benefit grandchildren and more remote descendants. This increased exemption will only apply until December 31, 2012 unless the law is extended which at the present time appears highly unlikely.

Unless Congress and the President take action prior to December 31, 2012, the new exemptions and tax rates will be as follows: * $ 1 million estate and gift tax exemption * An approximate GST Exemption of $1.34 million * Increased tax rates from 35 % to 55% on transfers above the exemption limit.

No one knows what will happen after the November 2012 election, however the bi-partisan consensus is that taxes will increase and government spending will need to decrease significantly. If no legislative changes occur prior to year end this opportunity to make large tax-free gifts may not occur again.

Appreciated property transferred by gift does not receive a step up in basis to the fair market value of the gifted property at the time of the gift as does property included in a decedent's estate at death. Due to this absence of step up in basis on appreciated property that is gifted, when the donee later sells some or all of the gifted property he will pay back some of the estate tax savings in the form of higher income taxes. However if past history is any indication of the future, the capital gains tax rates have historically almost always been lower than the federal estate tax rate, therefore a significant tax savings is still likely.

Some uncertainty exists about what if the current credit equivalent expires and new exemption limit is only $1.0 million and how would the tax liability be computed for a decedent who fully used his lifetime exemption of $ 5.12 million in 2012. This issue has never arisen before because until now the lifetime gifting exemption has never been reduced from a prior amount. The current law establishing the $ 5.12 million exemption for 2012 was passed without any consideration of a possible clawback and Congress is aware of this issue. The Sensible Estate Tax Act of 2011 as set forth in HR 3467 contains language to prevent a clawback. Even if a clawback were to occur, any appreciation in value of the gifted property between the date of the gift and the date of the donor's death would escape estate taxes.

Those individuals and families who can afford to do so should consider making use of this significant opportunity to make increased tax free gifts. Planning and implementing large gifts take time especially when these gifts involve iliquid assets ( such as securities in a closely held family business, farm land or collectibles) that require independent valuation by professional appraisers or business valuation consultants. Therefore it makes sense to start considering such gifts and the implementation process for these gifts sooner rather than later because highly qualified appraisers and valuation consultants are going to have a very busy fourth quarter in 2012 working to meet the December 31, 2012 deadline.

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