Estate taxes vs Gift taxes – The fiscal cliff looms: decisions, decisions, decisions

Our California readers are no doubt aware that there is barely more than one week left and Congress and the White House have yet to agree on a plan to avoid the so-called fiscal cliff. If nothing is done, the Bush era tax cuts will revert to their previous rates and across the board cuts will occur to military budgets, social services and more.

How should estate planning proceed when estate taxes and gift taxes are up in the air? Those with significant assets are trying to engage in long-term planning for tax consequences, when all that can be seen is the void at the edge of the dreaded cliff.

Let’s look at those two decisions — gift taxes and estate taxes — one at a time.

  • Gift taxes: If Congress doesn’t act, the rate will fall back to 55 percent. If you give Aunt Dorothy $5 million before the end of the year, it will cost you precisely $5 million. However, when she sells the $5 million asset, she will need to pay tax on your capital gain, plus any appreciation earned after the gift was given. If you give Aunt Dorothy in January (after the cliff) you will also owe $2 million in a gift tax.
  • Estate taxes: If Aunt Dorothy inherits the $5 million next year, she would only owe taxes on the capital gains which occur after your death. However, she would owe estate taxes on everything in excess of $1 million. And when do you plan on dying?

Given the uncertainty, it may be a good idea to play the part of a generous Santa Claus this year, because the tax clause is likely to run out.

Source: Forbes, “Give Now Or Pay Later: Rich Face Dilemma With Fate Of Estate And Gift Taxes Up In Air,” Roberton Williams, Dec. 17, 2012

  • At our Ventura law firm we assist individuals and families with any matter pertaining to estate planning including tax planning related to gift taxes and estate taxes.