Taxes that are largely a concern of the very rich will soon affect far more people unless Congress steps in.
The impending drastic changes in the estate and gift tax laws are prompting a flurry of activity as 2013 draws near. Family members are making financial gifts, creating trusts, and considering other tax-minded moves.
Financial advisers and trust and estate lawyers have been flooded with requests for assistance in the final months before the record-high exemption for both taxes is scheduled to plunge to $1 million from $5.12 million on Jan 1.
If unaltered, the value of any estate in excess of $1 million will be subject to the estate tax, at a top rate of 55 percent next year, before passing to family or other heirs. Currently the top rate is 35 percent, starting at a level more than five times higher.
The concern may not stir sympathy among most middle-class Americans, but it’s a pressing issue for many in costly locations where it’s not unusual for household assets to surpass the million-dollar mark.
Both the gift and estate tax rates could be revised further after the November elections.
Here are three key strategic moves that can be made before the laws change:
Give away cash
For the time being, taxpayers can gift up to $5.12 million during their lifetimes without paying taxes. That total is above and beyond the $13,000 annual gift-tax exemption that many taxpayers are aware of. That exclusion allows you to make an unlimited number of gifts of up to $13,000 each year without incurring any taxes.
Many parents make large loans to their children to buy a home or for some other purpose. Calling it a simple cash gift, or forgiving a previous loan, can shrink the estate tax bill.
Put it in a trust
A fear of giving away too much and ending up short-handed in future years has caused ‘‘gifting paralysis’’ among well-off people who could benefit, said estate planning attorney Todd Angkatavanich, a partner at Withers Bergman LLP in New Haven.
Those still reluctant to make outright gifts to beneficiaries may wish to consider transferring assets into trusts, which can give the donor more of a say in how they are distributed. A trust is an arrangement in which an individual turns over property or assets to a trustee to hold for beneficiaries.
Give away a home
Giving a primary residence or vacation home to a child often is done through a qualified personal residence trust. The trust is irrevocable but specifies that you can maintain use of the property for a certain number of years. The property is then valued at a discount because heirs don’t get immediate use.
Retaining the right to live in the house makes it a neat scenario for those with expensive homes but are concerned about leaving themselves with too few resources, says Jim Cody, director of estate and trust services for Harris myCFO in Palo Alto, Calif.