FindLaw KnowledgeBasePublished: 2012-10-31
In her book “Living History,” Hillary Rodham Clinton said, “Fail to plan, plan to fail.” While this advice has general application it is especially pertinent to estate planning. Consider two wealthy men, Sam Walton and Elvis Presley. After their deaths, Walton's family continued to be wealthy while Presley's did not, all because of Walton’s estate planning and use of gifting assets. In fact, the Walton heirs paid no estate tax while Elvis' estate handed over 73 percent of its value to the government.
With the Tax Relief, Unemployment Reinsurance and Job Creation Act of 2010, Americans can gift away up to $13,000 each year and $5.12 million over a lifetime without paying a gift tax. A couple can give $13,000 to a single person each year (a total of $26,000) without tax implications. Anything over $13,000 per person or $5.12 million total is taxed at a maximum rate of 35 percent.
The alternative is a 55 percent death tax of the total value of an estate at the time assets are transferred to one’s heirs. The tax applies not only to cash inheritance, but also to homes, cars, equipment, land and other tangible assets. Unless the heirs have cash available to pay 55 percent of the value of a home or property, heirs are usually forced to sell the asset to pay the tax. The death tax is a major barrier to passing a home or a farm down through generations.
The current limits on gifts and the maximum tax rate are the best in over a decade. Unfortunately, the gift tax is set to return to 2001 levels on January 1, 2013. That will drop the lifetime limit from $5 million to $1 million and increase the maximum tax rate above those amounts from 35 to 55 percent. The value of real estate, cars, retirement funds, life insurance benefits, stocks and other smaller assets can quickly add up to $1 million or more.
Gifting is a critical means of transferring wealth without the government getting its pound of flesh. However, one might wonder how they can survive during the sunset years if they have gifted away all of their assets. Gifting does not necessarily mean the loss of use or control. The key is transferring the assets to a holding company. Transferring the non-controlling interest in the holding company to an irrevocable trust is considered the gifting. A gift tax return must be filed with the IRS.
Through early and proper estate planning, one can potentially save themselves and their heirs millions of dollars in estate taxes at their death. Otherwise, the government will take more than half of any homes, land, cash and everything else. If you would like to preserve your hard-earned estate from estate taxes, contact an experienced estate planning attorney to discuss your situation and to learn of your options.