There’s Still (Barely) Time to Benefit from Favorable US Gift Tax Rates

Daniel B. Eagan and Andrew S. Auchincloss

The door is closing but has not yet shut for families hoping to benefit from the current favorable gift tax environment in the US. Those who are ready to act now may still be able to transfer wealth efficiently.

In a recent article, I quantified the potential benefit of this opportunity. But many clients ask, How likely is it that the gift and estate tax regime will really change? That’s a question no one can answer with confidence. There seem to be four broad possibilities for the gift and estate tax in 2013:

(1) a return to the 2001 estate tax law, with a $1 million exemption and 55% top tax rate;

(2) a return to the 2009 estate tax law, with a $3.5 million exemption and a 45% top rate (this is the current administration’s position);

(3) continuation of the current $5.12 million exemption and 35% top rate; or

(4) full repeal of the estate tax (this is the position of the Republican Party).

Option (1) is scheduled to arrive automatically on January 1, 2013, unless Congress takes action before then. But neither party openly favors this option, so most tax practitioners anticipate that Congress will eventually opt for (2), (3) or another solution—possibly during 2013 and perhaps with the effects retroactive to the start of the year. Option (4) seems unlikely. 

Unfortunately, families that wait until December for certainty on this point may find that it is too late to execute a planning strategy before year-end. First, it’s entirely possible that estate attorneys and other planning professionals will be too busy handling the usual year-end rush to engage in appropriate planning for everyone who calls. Proper planning in this context may be time consuming and require answers to a number of financial, tax and legal questions, such as: 

  • Can the client afford to make a large gift? 
  • If so, which assets should be given, and why? 
  • What are the needs and circumstances of the recipients (e.g., children)?
  • Would a trust better meet the donor’s objectives than an outright gift?

Second, trust agreements and other legal documents must be tailored to the particular desires of the client. Under normal circumstances, these documents could take days or even weeks to draft, and attorneys may not have the necessary time in December. 

Third, if the gift includes illiquid or other hard-to-value assets, a professional appraisal will be needed. This, too, takes time. Appraisers tend to be busy in the last few months of the year. And while it may theoretically be possible to appraise gifts after they have been made, donors often cannot know how much of an illiquid asset to give until they have at least retained and consulted an appraiser.

All of this leads us to conclude that people should act sooner, not later. 

Investors contemplating gifting (or not gifting) should discuss their circumstances with their attorneys, tax advisors and investment professionals. AllianceBernstein does not provide tax or legal advice.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Daniel B. Eagan is Head and Andrew S. Auchincloss is a Director of the Global Wealth Management Group in Bernstein Global Wealth Management, a unit of AllianceBernstein.          

Daniel B. Eagan

Daniel B. Eagan is a Managing Director and the Head of Bernstein’s Wealth Management Group; he assumed his current role in 2011. A member of the Private Client Investment Policy Group, Eagan joined Bernstein in 2001 as a senior portfolio Manager; in 2003 he assumed the leadership of Bernstein’s private client practice in the Northwest. Prior to joining the firm, Eagan was a senior portfolio manager and managing director with BlackRock for seven years. From 1986 to 1994, he worked in investment consulting, most recently with Mercer Investment Consultants. Eagan earned a BS in finance from the University of Illinois and an MBA with distinction from DePaul University.

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