Estate Measure Hikes Tax-Free Gifts To $10M

(Bloomberg News) Families would be able to make tax-free gifts to their children or others of as much as $10 million, an increase from the current limit of $2 million, under the tax-cut bill Congress is debating this week.

Beginning in 2011, an individual U.S. taxpayer's lifetime gift-tax exclusion will jump to $5 million, up from $1 million currently, according to the legislation. Gifts from living parents allow taxpayers to transfer assets such as cash, stocks or shares of a business to their kids and let the value grow outside of the couple's estate, said Jim Cundiff, an estate planning attorney with McDermott Will & Emery, who's based in Chicago. Unifying the estate and gift tax exemptions is one of the biggest benefits in the measure, he said.

"You could transfer $10 million next year without paying any tax," Cundiff said. "That's a big tax-free gift. This benefit evaporates in two years, so take it while you can." Parents may use trusts to give the money to descendants if they're concerned about giving a lot of money directly to their children, he said.

Senate leaders released an agreement on Dec. 9 crafted by President Barack Obama and Republicans to keep existing tax rates through 2012 that also included the changes to estate and gift taxes. The bill, which is scheduled for a vote this week, sets a $5 million threshold for an individual or $10 million for a couple for both estate and gift-tax levies, with a top tax rate of 35%. The provisions would expire at the end of 2012, according to the legislation.

The lifetime gift-tax exemption has been $1 million since 2002, while the estate-tax threshold increased to $3.5 million in 2009, according to the Joint Committee on Taxation. This year the estate tax disappeared as a result of a phase-out approved in 2001 during the presidency of George W. Bush. The gift-tax exclusion remained at $1 million with transfers above that amount taxed at a 35% rate.

Democrats in the House of Representatives may push for changes to the estate-tax provision with a 45% top rate on estates and a $3.5 million exemption for each person because of the U.S. budget deficit.

"We just can't afford that kind of giveaway to the very wealthiest among us," said Senate Budget Chairman Kent Conrad, a North Dakota Democrat on Bloomberg Television's "Political Capital with Al Hunt" on Dec. 10.

The estate tax will return Jan. 1 at a top rate of 55% and a $1 million threshold, unless Congress acts. That's why planners spent much of this year preparing wealthy clients to make gifts in 2010 while rates were lower, said Linda Hirschson, an estate-tax lawyer at Greenberg Traurig LLP in New York.

If the estate and gift tax exemption ultimately are set as high as $5 million in 2011 and 2012, families looking to transfer wealth before they die will likely hold off making gifts this year, Hirschson said. "Using $5 million for everything is really generous," Hirschson said. "It certainly will increase the gift giving."

Taxpayers who have already used some of their lifetime gift exclusion will have the amount that can be transferred tax-free under the $5 million exemption reduced, said Cundiff of McDermott Will & Emery.

In addition to the lifetime gift-tax exclusion, individuals can continue to give a tax-free gift of $13,000, or $26,000 for a couple, a year for each beneficiary. The amounts are indexed for inflation and remain the same next year, according to the Joint Committee.

The legislation also didn't restrict some of the wealth- transfer techniques used by estate planners such as grantor- retained annuity trusts, known as GRATs, said Elizabeth Schlueter, head of wealth advisory for New York-based J.P. Morgan Private Wealth Management, whose typical client has between $5 million and $25 million in investable assets. GRATs allow the appreciation of certain assets such as stock to pass to heirs free of estate and gift taxes. The bill, for example, doesn't set a 10-year minimum term on GRATs as Obama wanted in his 2010 revenue proposals, which may have made them less valuable.

"As of today GRATs continue to be a very strong opportunity for clients," said Schlueter. "We all have to be a little careful that we don't make decisions before there's a little more certainty."

The tax bill also would extend jobless aid and a number of existing credits subsidizing adoption, higher education and child care. Social Security payroll taxes would be cut by two percentage points for 2011. The legislation would add $858 billion to the federal debt over 10 years, government analysts said.