New Opportunity Under the Federal Gift Tax

The 2010 Tax Relief Act, which was noteworthy for some of the most favorable estate tax provisions in decades, opened up an opportunity to give more than ever to friends, family, and favored causes while avoiding the federal gift tax.

To make the most of tax-free gift transfers, a good first step is understanding the two types of federal exclusions (or exemptions) that apply to gifts.

Annual Gift Tax Exemption

You can transfer up to $13,000 in cash or certain types of property to as many people as you wish each year without any gift tax liability. (The exclusion is indexed annually for inflation.) Together, you and your spouse can give up to $26,000 annually. Your gift could be cash or income-producing assets such as stocks and bonds that have the potential to appreciate in value.

Some gifts may not be subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to qualifying charitable or political organizations, and payments of tuition or medical expenses on behalf of another person that are paid directly to the educational or medical institution.

Lifetime Gift Tax Exemption

The 2010 tax law reunified the federal estate and gift tax exemption, increasing it to $5 million in 2011 and 2012 (the gift tax exemption was only $1 million in 2010). There are two caveats associated with this change:

  • The amount you apply to your lifetime gift tax exemption may reduce your estate tax exemption. For example, if you used $2 million of the gift tax exemption during your lifetime, your $5 million estate tax exemption would be reduced by this amount.
  • The $5 million estate and gift tax exemption applies only to gifts made in 2011 and 2012. In 2013, unless lawmakers take further action, the federal gift and estate tax exemption will revert to $1 million.

Because of the temporary nature of estate and gift tax laws, you may want to consult with your tax and estate professionals before you take any specific action.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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Investors should consult with their own professional advisor regarding the potential tax, estate, and legal considerations that may arise in connection with entering into a life settlements transaction. Proceeds from a life settlement transaction may be taxable under federal or state law to the extent the proceeds exceed the cost basis. The proceeds from a life settlement transaction may be subject to claims of creditors. The receipt of proceeds from a life settlement transaction may adversely impact eligibility for government benefits and entitlements.  The amount received for the sale of the Policy may be impacted by the circumstances of the particular purchaser of the Policy, the insured’s life expectancy, future premiums, the death benefit, the terms of the Policy, and the current market for insurance policies, among other factors. The amount received for the sale of the Policy may be more or less than what others might receive for the sale of a similar policy. There may be high fees associated with the sell of a Life settlement. 

Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.