After the U.S. Congress voted in 2010 to raise the federal tax threshold for gifts from $1 million to $5 million, many Americans took advantage of the higher limit.
According to Bloomberg, recent IRS data found that U.S. taxpayers reported $122 billion in tax-free gifts in 2012. Of that total, $84 billion was attributed to gifts valued above $1 million, and fewer than 30,000 people were responsible for this portion. Furthermore, the total amount of reported tax-free gifts was four times higher than the totals in 2011 and 2010.
When the law was first implemented, Congress had intended for it to be temporary, as it was set to expire in December 2012. Wealthy Americans were aware of the planned end date and rushed to make their tax-free gifts while they had the chance. In regard to estate planning, these non-taxable gifts allowed individuals to pass on large sums of money to their heirs without having to pay estate taxes.
A mad dash
Given the December 2012 deadline for giving gifts under the raised tax threshold, many estate planning consultants instructed their clients to take advantage of the higher limit before the expiration date. As a result, 2012 was a busy year for the transfer of tax-free gifts, especially given that it did not seem as though Congress would be extending the law.
However, lawmakers decided in January 2013 to permanently extend the law. Instead of having a set limit, it will adjust each year to match inflation. For 2014, the estate, gift and generation-skipping exemption is $5,340,000, so there is ample opportunity for tax-free wealth transfer to loved ones.
Now that the law is here to stay, the rate of tax-free gifts in the future is expected to taper greatly from the spike seen in 2012. Even still, making non-taxable, lifetime gifts may still remain a viable option for passing on the highest amount possible to heirs.
In the fiscal year that ended Sept. 30, the U.S. collected $18.9 billion in estate and gift taxes. Additionally, the gift tax rate is currently at 40 percent, up from 35 percent between 2010 and 2012. It should be noted, however, that the lifetime exclusion is applicable in addition to the current $14,000 annual gift tax exclusion.
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