As a result of the tax cuts enacted under former President George W. Bush and extended under President Barack Obama, the estate and gift tax currently is set at a maximum rate of 35% with a $5.12 million exemption amount. But unless Congress takes action, the maximum estate and gift tax rate will revert to 55% and the exemption amount to $1 million, effective January 1, 2013.
It is uncertain what, if anything, Congress will do. But given the impending “fiscal cliff” and substantial pressures to increase taxes, particularly on those with high net worth, there would appear to be a significant possibility that the estate and gift tax environment will become less favorable after the end of 2012.
As a result, there could be a one-time opportunity to make substantial gifts without incurring gift tax. Since the gift and estate taxes are unified, an individual currently can make gifts up to $5.12 million (and a married couple up to $10.24 million) without incurring gift tax. These amounts are set to reduce to $1 million for an individual and $2 million for a couple, effective January 1, 2013.
Exit Strategies appraises operating companies and asset holding companies for gifting, estate tax, and other purposes. You must establish fair market value of gifted assets as of the date of gift, and an independent valuation by a qualified business appraiser is often your best defense against an IRS challenge. For fractional interests, we quantify appropriate discounts for lack of control and marketability. Our quality valuation reports comply with USPAP and IRS business valuation standards, and we are prepared to defend our work in the unlikely event of an IRS audit.
If you think you might benefit from making sizeable gifts before year-end, contact your CPA and/or tax attorney right away, while there still is time to formulate and implement an appropriate strategy. Time is running out.