We hear repeated "street talk" about repealing the Estate Tax, however the Gift Tax is scheduled to remain in effect. Every individual has an applicable lifetime exemption that can be used during life or at death; that is to say, you can transfer $1,000,000 to another person (or entity) without any Gift or Estate Tax consequences. During the balance of this calendar year 2003, the tax rates for gifts and estates remain the same, but commencing January 1, 2004, the "Unified Tax System" will no longer exist. This year, the maximum amount you can gift or transfer at death is $1,000,000. Commencing January 1st, you can transfer through your estate at death $1,500,000 without Estate Taxation, but you can only transfer by gift during life $1,000,000 without incurring Gift Taxation. Also, the amount that you may gift will remain $1,000,000 while the amount you can transfer through your estate at death increases; in fact, during the calendar year 2010, the amount you can transfer through your estate is without limitation, however on January 1st 2011 the amount you can transfer through your estate returns to $1,000,000 before Estate Taxation is activated.
Many individuals, while proceeding with Estate Planning, will transfer by Gift $1,000,000 during their life, so any future appreciation is removed from their estate and therefore nor taxed! Also, remember that income generated by the gifted property is not income taxable to you; this income tax event is also "gifted" to the recipients of your generous gift (unless the transfer is to an "Intentionally Defective Grantor Trust").
Some individuals have intentionally gifted assets in excess of the $1,000,000 and paid the appropriate gift tax on the transfer; however, if full and permanent repeal of Estate Tax occurs, the informed client will not gift, but will allow this transfer to occur at death, when a transfer will take place without Estate Taxation and maybe even with a stepped-up basis.
Clients have sometime leveraged their "gift" through the use of various techniques such as a "Family Limited Partnership". Too often this procedure is utilized to reduce the value of the asset that is subject to taxation. For example, a parent gifts an asset to a Family Limited Partnership; the asset that is "gifted" is then reduced in value due to the lack of marketability and/or control of the asset; this reduction in value allows more "gifting" because the "value" of the asset is smaller (therefore, more can be "gifted" before taxation commences). The Internal Revenue Service does not like Family Limited Partnerships, it views them as a strategy to reduce asset values for Estate and Gift Tax purposes without actually reducing the underlying value of the asset.
