Gift Giving “Opportunity” for the Wealthy in 2011 and 2012

If Congress fails to act before 2013, the estate and gift tax exemption will drop to $1 million, and the rate will rise to 55%. Other benefits will also be lost, such as the portability clause. For this reason, the very wealthy may want to take advantage of the beneficial estate tax provisions over the next two years by gifting away large amounts of money and reducing the size of their estates.

This strategy sounds similar to the one advocated near the end of 2010. At that time, advisers were recommending that their clients give large gifts and incur a 35% gift tax before the rates rose to 55% in January. This turned out to be bad advice. In 2011, the gift tax-free amount rose from $1 million to $5 million, meaning that some donors could have avoided the tax altogether had they waited until 2011 to make gifts. Further, the rate stayed at 35% instead of rising to 55%, so paying gift taxes in 2010 really wasn’t a good deal at all.

Similarly, this new gift-giving “opportunity” of 2011 and 2012 is only a bargain if Congress does nothing before 2013, which we can’t be sure of. Further, there is a possibility that if the tax-free amount drops to $1 million in 2013, a gift tax may be due retroactively for gifts given in 2011 and 2012 over that limit.

American philosopher George Santayana once famously stated, “Those who cannot remember the past are condemned to repeat it.”

Deborah L. Jacobs, New Estate Tax Law Poses Dilemma for the Rich, Forbes, Feb. 2, 2011.