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Taking Advantage of the Gift-Tax Exemption Before It Lowers

In 2011, the amount of money that a person could give away as a gift without incurring tax penalties rose from $1 million to $5 million. Congress indexed the amount to inflation, so the total amount a person can give in 2012 under the gift-tax exemption is $5.12 million.

However, the gift-tax exemption amount is set to revert to $1 million at the end of 2012, so estate planning experts are advising people to take advantage of the higher gift-tax exemption amount in 2012 to help lower their total holdings and reduce the estate taxes that their loved ones will have to pay. There are a number of ways that people can take advantage of the gift-tax exemption before it is reduced.

Forgiving Loans

Family members often make low-interest loans to one another. Forgiving such debts is a way to utilize the gift-tax exemption. However, experts urge people to proceed with caution when doing this. Unless people follow all of the formalities, the IRS may view such action as debt forgiveness that is taxable as income to the gift recipient.

Equalizing Gifts

In families with grandchildren who vary widely in ages, some grandparents use "equalizing gifts" to take advantage of their gift-tax exemption. In such cases, the grandparents give the grandchildren gifts each year equal to the annual gift-tax exclusion amount. The grandparents then include a provision in their wills or trusts giving the younger children a gift so that the total amount of money that each grandchild received over their lives is equal.

Spousal Limited-Access Trusts

Estate planners have long used irrevocable trusts with spouses, children and grandchildren as beneficiaries as a way to help people utilize the gift-tax exemption to the fullest. A slightly updated version of such trusts is the Spousal Limited-Access Trust, which contains provisions allowing the trust to distribute more money to the surviving spouse should his or her economic situation change greatly.

Such trusts retain the benefit of removing assets from the grantor's estate with the added safety of letting the surviving spouse access the funds, should the need arise.

Talk to a Lawyer

Estate planning can become complicated due to the ever-changing nature of tax laws. If you have questions about the best way to preserve your assets for your loved ones and to minimize transfer taxes, speak with an experienced estate planning attorney.

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Robert M. Mendell, Attorney at Law, P.C.
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