August 21, 2014

Giving gifts, despite the fiscal cliff

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By Luke Baynes

Observer staff

As the U.S. economy inches closer to the fiscal cliff that will ring in the new year should congressional Democrats and Republicans fail to reach a budgetary compromise, most estate planners agree: ’tis the season for giving.

The fiscal cliff, a catch-all term for the series of tax increases (due to the expiration of the Bush-era tax cuts) and across-the-board budget cuts (known as sequestration), also carries with it changes to estate and gift tax laws.

“When it comes to gifting to your heirs, this year there is an unprecedented opportunity that is expiring—or is at least scheduled to expire,” said Ken Nussbaum, a Richmond-based certified public accountant.

Currently, estates with a net value of $5.12 million or less are exempt from the federal estate tax. By the same token, the current lifetime gift tax exclusion is also set at $5.12 million. Amounts above the gift/estate exemptions are currently subject to a maximum 35 percent tax rate.

If the respective party leaders fail to reach a grudging accord before the dawn of 2013, the lifetime gift and estate tax exclusion figure will be reduced to $1 million, with amounts exceeding that limit subject to a maximum 55 percent tax rate.

To put it callously, should an old miser suddenly decide to gift $5.12 million of the farm on Dec. 31, then die during a college bowl game the next day, his estate would escape taxation on $4.12 million of what would have become taxable assets.

Patricia Nowak, a Williston-based financial adviser, agreed that the time is now to gift assets to one’s heirs—regardless of what happens between now and New Year’s.

“Right now, people have kind of a fire sale to give away,” Nowak said.

But she was quick to insert that gifting of cash or securities—and the ramifications of the potential gift and estate tax changes—shouldn’t exclusively be a consideration for the so-called rich.

“You might say, who does it really hit?” Nowak said. “Well you know what’s interesting, it hits a lot more people than most people know, because when you take a look at what gets taxed in your estate … the face amount of your life insurance that you personally own (is included). So you take a young person who has taken out a couple million dollars to protect their family—that’s $2 million already in their estate.”

Nussbaum, who pointed out that gifts to one’s heirs are separate from charitable gifts—the latter of which are deductible up to 50 percent of one’s adjusted gross income—also drew the distinction between a person’s lifetime estate exclusion amount and the separate annual gift tax exclusion of $13,000 per recipient, per year (set to increase to $14,000 in 2013).

“The annual exclusion amount is absolutely a use it or lose it,” Nussbaum said. “If someone is thinking about gifting, that would be the place to start. So if you’re thinking about gifting, start with the annual exclusion amount.”

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