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Estate and Gift Tax Part of the Budget Deal

UncleSamFor the first time in more than a decade, we finally have long-term clarity about the estate and gift tax system. I had really hoped to blog the details in real time. But, unfortunately, I got hit by a combination of bronchitis, a sinus infection and the flu, which had me out of commission for more than a week.

So, because I pretty much missed the “early bird” prize, I will share the short version: The estate and gift tax exemptions are now permanently set at $5.12 million per individual, with a tax rate of 40 percent above that.

Many individuals with large estates made significant transfers at the end of 2012 in anticipation of changes in the estate and gift tax system. We now know that those changes will not occur. Still, for most people, those transfers were not a mistake. Those assets are now outside of their taxable estates and will continue to grow over time. Under most scenarios, that will result in a far better outcome than leaving the assets in the estate until death.

Still, the new law does present one further consideration for those who made large gifts in 2012. The increase in the rate from 35 to 40 percent may make it beneficial to pay tax on the transferred property rather than use the gift tax exemption. If, for example, a person may consider making additional gifts down the road, paying the tax on this year’s gifts would result in a five percent tax savings on the future gifts.