2012 Estate Planning Opportunities & Year End Considerations

By: Mathew Sorensen, Partner KKOS Lawyers

The 2012 estate and gift tax exemption is $5,120,000. This means that the first $5,120,000 of an individual’s estate may be inherited (at death) or gifted (during life) in 2012 before any estate or gift tax is due. This exemption amount will be reduced to $1,000,000 in 2013 unless the Congress and President act on a compromise plan to fix the current reduction in the exemption. As a result of the significant reduction in the exemption, many individuals are contemplating a transfer of assets by gifts to their children/heirs now as a way to reduce their estate and to utilize the large exemption amounts while they can.

If you are an individual with a large estate (over $2M) you should consider whether to gift certain assets to family members while the exemption remains high. There are certain items to consider when analyzing your estate and determining whether to make a gift now as a result of estate and gift tax laws.


First, when you gift during your lifetime the tax basis in the asset transfers to the person who receives the gift. In other words, if you have a property you bought for $100,000 that is now worth $300,000, the person receiving the gift would receive your $100,000 tax basis such that when they sell the property they pay capital gains taxes on anything above $100,000. When someone inherits property upon death, however, they receive tax basis in the property at the fair market value of the property at the date of death.  So, if the basis to the owner was $100,000 but the fair market value was $300,000 at their death the heir would get the property at a $300,000 tax basis and when they sell the property they would only pay taxes on any gain above $300,000 (as opposed to $100,000 with a gift during the lifetime of the donor). As a result of the tax basis rule difference between receiving property at death or by gift during life, we recommend clients retain highly appreciated assets that may be subject to capital gains and instead pass those on following their death.  Contrastingly, assets with high tax basis where there would be no large capital gains are excellent assets to gift since there is no tax benefit to retain until death.


A second planning item to consider for married couples is using the gift tax exemption of only one spouse when gifting. Under current tax law, each spouse has their own separate exemption and you can utilize one spouse’s gift tax exemption (or a portion) now during their lifetime while leaving the other spouse’s exemption totally un-used and available to the other spouse. Special planning and tax reporting needs to be taken into account in this situation but the benefit of having one spouse use up a large part of their exemption and to take advantage of a very large gift tax exemption – while we know one is there – is a significant benefit and we leave the other spouses exemption totally un-used and available for future years (whatever those limits may be).


The last item to consider is what types of assets may be transferred by gift now. There are a few assets that are very good assets to transfer by gift now. First, if there are any large loans to family members that may be forgiven as part of your estate you may want to consider forgiving those loans now as a way to lock in the large gift tax exemption.

High basis stocks or investment properties are also excellent assets to consider gifting now while the exemption is relatively large. Since these assets don’t have a high tax basis there is not an incentive to keep them and to let them transfer upon death.

Lastly, clients with very large estates who are making significant transfers may want to consider forming a Family Limited Liability Company (“FLLC”) or Family Limited Partnership (“FLP”) which own the assets and gifting portions of those company’s interests to their family members. These companies are used by many families to hold real estate, family businesses, or stock and are used to transfer value to family members over time in a tax advantageous way. Because of certain IRS rules regarding ownership in a family company the actual value of these ownership interests may be reduced and thereby a larger portion of value may be transferred in a FLLC or FLP during the lifetime of the owners than can be done in transferring the property or stock directly to heirs. The outcome of this is you can squeeze more value and gifting into the tax exemption with zero taxes in a FLLC or FLP than you can in transferring the asset outright.

Careful planning and tax reporting needs to be done when making large gifts and we can help develop a plan for your family and estate. In most situations, a gift tax return claiming the exemption (IRS Form 709) needs to be filed with the IRS (and in some states with state gift tax laws) and estate planning documents may need to be modified or amended.