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02/26/13


2013 Estate Planning: Gift Options and Tax Implications

Related Attorney(s): Micah A. Bonaviri, Caroline Ford Bonaviri, Ann G. Jakabcin, William H. Roberge, Jr., David B. Torchinsky , Steven A. Widdes

In 2013, the maximum Federal exemption for combined transfers during life and at death for each person is $5.25 million, which will increase annually based on cost of living factors. Thus, if a wealthy individual gives away $5.25 million in 2013, he or she will have used up the available current transfer tax exemption and will have no estate tax exemption remaining if his or her death occurs in 2013. Annual gifts of property (that are immediately available to the recipients) of $14,000 or less (what was $13,000 in 2012) do not count against the $5.25 million Federal transfer tax exemption.

Example: Your rich uncle who has 20 nieces and nephews could give $14,000 to each niece and nephew in 2013 and reduce his estate by $280,000 ($14,000 x 20). He could make the same $14,000 gifts again in 2014 to the same nieces and nephews and reduce his estate by an additional $280,000. None of these $14,000 annual gifts would reduce your uncle’s $5.25 million Federal transfer tax exemption remaining at the time of his death.

Individuals can also make gifts by paying tuition directly to an educational institution and medical expenses directly to a medical care provider without limit. The payment of tuition and medical care exception does not reduce the donor’s $5.25 million Federal transfer tax exemption.

Unlike the Federal transfer tax system, Maryland, Virginia and the District of Columbia do not have a separate gift tax. Both Maryland and DC do, however, have an estate tax with an exemption only for the first $1 million in assets held at death. Virginia does not impose an estate tax.

Example: If your father is a resident of Maryland and dies with an estate valued at $2 million, the estate tax due to Maryland would be $99,600. Your father could have given away $1 million of his holdings to you and your siblings during his life and leave the remaining $1 million to his children upon death. This strategy would eliminate the Maryland estate tax entirely. Note that while Maryland also has an inheritance tax, transfers to children are exempt from the imposition of such tax.

It is important to note that the cost basis for income tax purposes of any gifts in the hands of the recipient is the lower of the adjusted basis or fair market value at the time of the gift. Thus, gifted assets that have appreciated before the gift might result in substantial capital gain taxes when the asset is sold by the recipient. However, the basis of assets inherited from an individual is the fair market value at the time of death. This is known as a “step-up in basis” where assets that have appreciated during life, or a “step-down in basis” where assets that have declined in value during life. Thus, the sale of inherited shares of stock that are sold by the recipient immediately after receiving the inheritance generally results in no capital gains taxes being imposed.

Gifts should only be considered if the donor is reasonably comfortable that he or she will not need the money back. Before making any gifts, donors must also consider estate and gift taxes as well as potential capital gains taxes in the future on the sale of appreciated assets.

Attorneys in Stein Sperling’s Estates and Trusts department are available to review your specific circumstances and to help you determine what gifting strategies are most appropriate for you.


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