Under the U.S. tax laws, gifts you make during your life, and the amount of your estate at death, are taxed as one bundle under a "unified system." With the tax legislation enacted at the close of 2010, every individual has a $5 million exemption from the estate/gift tax. But we only have it for sure until the end of 2012.
To most American families whose wealth doesn't come near $5 million, this kind of talk is irrelevant or even absurd. But for families of great wealth the $5million exemption may actually be woefully inadequate. Wherever you stand on the wealth spectrum, using the exemption sooner rather than later is to your advantage.
To fully appreciate this government largesse, let's put it in perspective. Prior to 2011, under previous versions of the same "unified" system, the top estate tax rate was 55% and the maximum exemption was $3.5 million. When these generous provisions sunset at the end of 2012, like Cinderella finding a pumpkin instead of a carriage at midnight, we'll be left with a $1million per individual exemption and 55% estate tax rate.
But there is a glass slipper. Unique planning opportunities are created.
While clients are sometimes concerned about future financial security and use that as a reason to not make lifetime gifts, we can achieve optimal tax results and preserve your assets with a variety of sophisticated estate planning tools. While taxes are a "necessity" of life, clients sometimes don't realize how much of an estate can be lost to taxes if proper planning isn't implemented. Following is a dollar and cents example to illustrate how expensive it can be if you fail to plan:
Let's say you own an original Picasso valued at $3.5 million, which is likely to continue to appreciate at a high rate. Your child loves it and you want them to have it….eventually!
Leveraging the exemption and creating valuation discounts are the best tools we have now to maximize use of your exemption, and reduce your overall tax bill. In the pages that follow, we provide further illustrations of how these work. Sometimes clients shy away from these strategies thinking they are hard to understand or unduly complicated or unnecessary. Yet we employ these strategies for one purpose and one purpose only: to use the tax rules to reduce taxes and preserve assets you want to keep in the family.
If you're like most people, when you realize how much of your estate can be lost to taxes, you'd rather part with some portion of your assets now, to loved ones or charities, than give it away to Uncle same. After all, you've already paid income taxes on the funds used to acquire these assets. With the dual advantage of the increased exemption and low gift tax rate, truly the best advice we can offer is to ACT NOW to maximize your use of the exemption in a tax advantaged way.