With the uncertainty of the fiscal cliff in 2012, many people accelerated their gifting to take advantage of the favorable gift tax rates and exemptions. Although the actual gifting has already taken place, the gifting process must be completed by filing a Form 709 Gift Tax Return, and the deadline is looming at April 15, 2013. Here are a few things to keep in mind:

• Amount of the Gift – In general, for any gifts made in excess of the annual exclusion ($13,000 for 2012), you will probably need to file a Form 709. However, there are certain exceptions, and you should consult your CPA or attorney to confirm whether or not you need to file a Form 709. Even if you will not have to pay any gift tax on the gift, you still need to file a Form 709 return.
• Valuations and Discounting – If your gifting requires any valuations, as is common in the gifting of partnership interests, you must get the valuations to your preparer as soon as possible. If you have not made arrangements to do so, you may have to file an extension. Also, if your gifting utilized any valuation discounts, make sure the valuation adequately explains the discounting, and that the preparer further explains it to the IRS.
• Gift Splits – Keep in mind whether married couples are making separate gifts, or a mutual gift that will utilize gift splitting between the spouses. Spouses, whether making separate or combined gifts, must each file their own Form 709 tax return.
• Previous Gifts – If you have made prior gifts, you will need to report those gifts on your current Form 709, to keep track of the exemptions and any gift tax owed.
• Annual Exclusion – If you have made a gift, you can only take the $13,000 annual exclusion (for 2012) if it is a gift of a present interest. This could possibly be an issue for gifts made to irrevocable trusts.

It is better to be safe than sorry when it comes to taxes. If you have any concerns or questions about the gifts you have made, make sure you talk with the attorney who did your gifting and/or to your CPA. Also, if you have any concerns about your Form 709 being filed on time, make sure you get an extension to be avoid any penalties or interest.

On a different note, the fiscal cliff deal has maintained much of the favorable gift tax exemptions and rates. If you have any gifting you would like to do in the meantime, please contact our law offices and we can assist you.

Here are the links for Form 709 and Instructions.

The wait is over, at least for now. Congress passed a bill on January 1, 2013 that avoided the “fiscal cliff,” and is expected to be signed into law shortly. The new deal has some important consequences for estate planning and gifting.

Estate and Gift Tax

The good news is that the favorable $5 million estate and gift tax exemptions have been permanently extended. This means that the $5 million exemptions are not set to expire, as in the previous deal, but will remain indefinitely until Congress passes a new bill that changes it. This is important because it not only extends the exemptions, but it also avoids creating a new “fiscal cliff.” As a result, we will not have to speculate as to what will happen in the future because there is no deadline or uncertainty looming in the future. For now, we are assured that estates are exempt from tax up to $5 million, and lifetime gifts are exempt from tax up to $5 million.

More good news is that the exemptions still get indexed for inflation. Thus, the exemptions for 2013 increase to $5,250,000, up from $5,120,000 for 2012. Additionally, the exemptions retain their portability. This means that if a deceased spouse does not use up all of his/her exemption, the unused portion passes to the surviving spouse. Thus, a surviving spouse potentially can have up to $10,500,000 of estate and gift tax exemptions for 2013.

Annual Gifting

Other good news is that the annual gifting exclusion increases to $14,000 per year. This means that you can make a gift of up to $14,000 each year to an unlimited number of individuals, and those gifts will not use up any of your $5,000,000 gift tax exemption. The previous exclusion was $13,000 for 2012. This exclusion applies to each individual. Thus, both spouses can make separate $14,000 gifts to any individuals without using up their lifetime exemptions.

Estate and Gift Tax Rate

The seemingly bad news is that the estate and gift tax rates increased from 35% to 40%. However, this is actually good news because the rates were set to increase to 55% if a new deal was not reached. Considering the circumstances, the new 40% tax rate is still generous in comparison to what it has been in the past, and what it would have been with the fiscal cliff.

Generation Skipping Transfer (GST) Tax

The new deal also calls for an additional 40% tax on a transfer that is made 2 or more generations below the transferor of the gift. In other words, if a grandparent made a transfer to his/her grandchild, it would be subject to an additional 40% tax after any estate or gift tax was applied. However, you can still shelter up to $5 million worth of assets from the generation skipping transfer tax.

Medicare Tax

The bad news here is that the new 3.8% Medicare tax rate on net investment income applies to not only individuals, but also to trusts and estates. In other words, any net investment income earned on a trust or estate is subject to 3.8% Medicare tax.

Overall, the new deal is favorable for estate planning and gifting. The exemption amounts are high and permanent, and the new tax rate is relatively low. In general, although the new deal did not address every uncertain estate planning issue, but it finally solidified the estate and gift tax uncertainties that loomed in the previous years

With the year end fast approaching, there is no time to waste for those who want to take advantage of the current estate and gift tax exemptions. There is a current exemption for both estate and gift taxes of $5.12 million for each person and a maximum 35% estate tax rate. These amounts are set to expire at the end of 2012. Although we do not know what will happen until after the election, we do know that if Congress does nothing, the exemptions will revert back to $1 million and the maximum estate tax rate will go back up to 55%. Congress may extend the current exemptions, or they may decrease the exemptions to a lower amount. It is almost certain they will not increase. Thus, it is important to act now if you have a large estate and/or want to make substantial gifts before the year ends.

One thing to keep in mind is the portability of the current estate and gift tax exemptions. Portability means that the unused portions of a deceased spouse’s exemptions transfer to the surviving spouse. For example, if one spouse dies and has not used any of her gifting exemption, then the entire amount transfers to the surviving spouse, in addition to the surviving spouse’s unused exemption. In other words, a surviving spouse can have up to $10.24 million of exemptions, instead of the normal $5.12 million! However, in order to use this portability, you must timely file a Form 706, upon the death of a spouse.

The Form 706 must be filed for any estate wanting to use the portable exemption – even estates that are nontaxable, or that do not exceed $5.12 million for 2012. The Form 706 has a new section that will allow you to take advantage of the portable exemption. If your spouse has recently deceased, and you want to make sure you get the benefit of the portable exemption, then you must act promptly to file the Form 706. Here is a link to Form 706 on the IRS website. Please contact us if we can help you with any of these matters.

When a person deceases, whatever assets that person owns will either pass through probate or they will not. Probate is the legal way to transfer the assets
of someone who has deceased, and involves the use of probate court proceedings. Probate occurs primarily in two scenarios; first, when the deceased executed a will during his/her lifetime (testate), and second, when the deceased did not execute a will (intestate). If the deceased legally and effectively executed a will, then the probate courts will transfer the decedent’s assets according to that will. If there was no will, then the probate court will transfer the assets according to state intestacy laws. It is possible that part of the decedent’s assets go through probate and part of them do not (partial intestacy).

Consequences of Probate

Understanding the probate process is important for every person because of the consequences that result from probate proceedings. One of the consequences that might arise from probate is not having your estate and assets transferred to whom you want and/or in the way you want. Those who do not execute a will leave their entire estate up to the probate courts. Even those who execute a will still must go through probate, although the probate courts will administer the estate in accordance with the will; however, wills that are not properly executed can still leave assets that go through probate. Another consequence of probate is that it usually is time consuming. Most of the time time, probates will take anywhere from nine  months to two years or more, depending on the size of the estate. Even smaller estates can take many months or more to go through the probate process. A further consequence of probate is that is is often costly. Between filing everything with the courts, attorneys fees, and other costs, probate could substantially diminish an estate.

Ways to Avoid Probate

Although there are advantages to probate, those advantages are just as effectively, if not more so, attainable through means other than probate. A useful and common way to avoid probate is to do some estate planning, including creating a living trust. Livings trusts allow people to protect their assets from probate and transfer them to whom they want and in the way they want, without going through probate. Another way to avoid probate is hold an asset in joint tenancy. Joint tenancy allows the survivor to automatically take complete title to the asset in joint tenancy in the event the other joint tenant deceases. A further way to avoid probate is to hold assets that designate valid beneficiaries, such as IRA’s, 401K’s, and annuities. Upon the death of the owner of such an asset, the beneficiary will usually take the asset free of probate. Probate can also be avoided for small estates, pursuant to state probate statutes.

Normally, probate should be avoided and the most efficient way to do so is through estate planning.Although we have touched on some of the basics of the probate process and its consequences, there is more to probate than what is discussed in this article. Our law firm can help you understand the probate process better and how to utilize estate planning to avoid it.

One of the common misconceptions people have about estate planning is the idea that you have to be wealthy to execute an estate plan, or that an estate plan is not worth while unless you have accumulated a lot of wealth. Although wealthy individuals can take advantage of certain estate planning tools and strategies, those who are not as wealthy can also benefit greatly by setting up an effective estate plan.

What You Own, Not How Much You Own

Do not mistake a small estate with no estate. Although most people in society are not millionaires, most people own something, whether it is a car, a house, bank accounts, retirement accounts, jewelry, or other personal possessions. The beauty of estate planning is its adaptability to help any person decide how to protect and pass on whatever that person owns. Think of estate planning as the means to making sure that what you do have is taken care of the way you want it, regardless of how much you have. If you do not do any estate planning, you are essentially handing over your estate to the probate courts to decide how to distribute your assets upon your death, and the way the state decides it will likely be different from what you want.

Assets Aren’t the Only Things

Another reason estate planning is important for every person is because it protects much more than your assets. For example, what happens to you if you become incapacitated and are unable to make your own healthcare decisions? What happens to your kids if you unexpectedly pass way? Who is going to take care of them? These are just a couple of examples of how estate planning is important for everyone, not just the wealthy. With effective estate planning, you can execute a health power of attorney or a living will, which will ensure in the event of your incapacitation, that health care decisions are decided how you want. Further, an estate plan will allow you to name a guardian to take care of your children in the event that you pass away or are otherwise unable to do so. Nothing would seem more tragic than for someone to get in an accident and have little or no control over their own health or the well-being of their children.

Be Proactive

When it comes to your life’s work, whether it be your wealth, your family, or your own well-being, you do not want to leave anything to chance. Whether you own a little or whether you own a lot, you need to execute an effective estate plan. Doing so will protect and give you control over all of the important things in your life you have worked so hard for.