One of the biggest intergenerational transfers of wealth in U.S. history could potentially take place over the next two years as an expansion of the gift-tax exemption creates a short-term opportunity for the wealthy to transfer assets now and avoid estate taxes later.
For 2011 and 2012 only, the gift-tax exemption increases from $1 million to $5 million, allowing individuals to transfer five times more assets to relatives without penalty. It's estimated that the federal government could lose as much as $68 billion in estate and gift taxes as the wealthy rush to capitalize on this temporary change in the tax code.
The new law amounts to another tax cut that most Americans won't be able to take advantage of. However, to the extent that wealthy people transfer assets to relatives who aren't so wealthy, it could have a positive affect.
Kevin Sanderford, principal of Colorado West Investments in Montrose, Colo., says older individuals with estates valued at more than $1 million and couples with estates valued above $2 million should consider taking advantage of this change. He's advising his high net-worth clients to begin executing asset transfers and business succession plans that previously had much longer time horizons.
The benefits include being able to transfer a greater amount of assets tax-free before you die and saving relatives millions of dollars in estate taxes before the law reverts back in 2013. In 2013, the gift tax goes back to the $1 million exemption, and the estate tax rate jumps from 35% back to the 55% rate that was in place prior to the Bush tax cuts. That is, unless new tax cut legislation is passed. (For more about what else is new in the tax code this year, check out WalletPop's Tax page.)
"This allows people to give away more money and assets to kids and keep things in the family," says Sanderford. "We are a talking about intergenerational wealth transfers, and the opportunity exists now. I don't think the opportunity will exist in the future"
With the new change in the gift tax, individuals could give away $5 million in 2011 or 2012 and not have to worry about paying estate taxes later. People can give away real estate, jewelry, family heirlooms, cash, stocks, bonds and even businesses.
"Some of my clients have businesses, and if their kids have to come up with $3 million or more to pay taxes, where does that money come from?" Sanderford asks. "Avoiding taxes makes it easier for that business to go from one generation to the next."
To get the maximum benefit of the asset transfer, Sanderford suggests gifting assets that will appreciate the fastest. For example if you are considering gifting either timber land or a condo in New York, he says gift the condo.
"Sit down with a CPA and tax attorney and do some planning," he says. "This is a huge opportunity with a two-year window."