While the Bible asks that we “Render under Caesar that which is Caesar’s,” there is no reason to render unto our government any more than our fair obligation. Nowhere is this truer than in the case of the lifetime gift tax, an element of America’s famously harsh estate taxes. Had the government not passed their latest round of tax cut laws, the top rate for estate taxes could have risen to a horrendously painful 55 percent, or at the very least the generally applied 35 percent.
Instead, nestled within the latest provisions is a new window that may allow you to gift your wealth to your heirs without having to pay a cent of the onerous estate taxes. Known as the Gift Tax Exemption, it runs from January 1, 2011 to December 31st, 2012. In this short window, the normal lifetime tax free gift limit is raised from $1 million per person and $2 million per couple to $5 million per person and $10 million per couple.
What does this mean for you? It means a unique opportunity to pass on the things you’ve worked hard to acquire over the course of your lifetime without letting Caesar take out the lion’s share. This can include your business holdings, real estate, marketable securities, fine art, and life insurance. To get a better picture of how you can use the Gift Tax Exemption to your advantage, consider the following three scenarios.
1. Passing On A Family Business
Transferring a family business to the next generation can be a considerable point of stress when it comes to the tax side of things. You have your book of business, your buildings, your operating equipment, your web domains, and dozens of other parts and parcels that go into the business. According to the government’s usual rules, passing the business on would cost between 35 and 55 percent of the total value.
With the new Gift Tax Exemption, you can move the business to your heirs without being subject to the tax, especially since the exemption caps your gift per heir at $5 million as an individual and $10 million as a couple. With three children or grandchildren, you and a spouse could pass on up to $30 million to the next generation, tax free.
2. Preserving Land Holdings
Another way to use the Gift Tax Exemption to your advantage is to preserve family land holdings. Why make your children sell the family home to pay off Uncle Sam? It can be gifted. Why should the farm you’ve carefully tended for decades be broken up to pay estate taxes? Gift it to your heirs, keeping the land intact and protecting it from tax penalties even if it appreciates dramatically over the next few years.
3. Transferring Wealth Tax Free
A third scenario for using the Gift Tax Exemption to your advantage is to transfer your personal wealth tax free. Even if you don’t have millions, being able to move your savings to your heirs without tax penalties is a priceless gift for both you and them. You can move life insurance, annuities, stock holdings, and other forms of marketable wealth.
Naturally, these three scenarios are just a few of the ways that you can use the Gift Tax Exemption to save your estate from a big tax bill. You can likely think of more, and partnering with a financial advisor, accountant, or lawyer could help you find the best way to restructure your estate to get the most out of the exemption while it lasts.
Control is naturally a concern. Working through LLC’s for gifting the assets you have can help you maintain control by structuring your gifts so that you and your spouse retain all the voting shares in a business or over a piece of land while gifting your heirs the asset tied to non-voting shares. In this way, you can lock in the tax benefits of the Gift Tax Exemption now even as you continue to operate your business, live on your land, and enjoy the fruits of your labors.
There’s no reason to gift Caesar more than his rightful share, and with the Gift Tax Exemption, you won’t have to unless you miss the window. Starting planning now to ensure that before this exemption expires December 31st, 2012, you have your wealth structured in such a way as to give the most benefit to your heirs and lower or eliminate the tax burden on your estate.