The Tax Relief Act provided significant new opportunities for lifetime gifting and passing a greater amount of assets at death without adverse gift or estate taxes. While Congress and the President surprised many of us in 2010 with more taxpayer friendly provisions than were expected, perhaps we should not be surprised that no action has been taken to extend these provisions beyond December 31, 2012, which is when they will automatically expire unless Congress and the President take action to extend them.
The Tax Relief Act increased the gift and estate tax exemption amount to $5 million per person indexed for inflation. The exemption amount is important because it is the dollar value of assets that can be transferred during life or at death without any adverse gift tax or estate tax consequences. The exemption amount for 2012 is $5.12 million which is dramatically larger than the $1 million exemption which will be in effect on January 1, 2013 without further legislative action.
Another significant change to the estate tax laws was the enactment of "portability" of a deceased spouse's unused estate tax exemption to the surviving spouse. Historically, the exemption amount was limited to just one individual so if a spouse died without significant assets titled in his or her individual name, the remaining exemption amount was lost. With portability, a surviving spouse is able to take advantage of a deceased spouse's unused estate tax exemption. As with the other taxpayer friendly provisions of the Tax Relief Act, the portability provisions will expire on December 31, 2012.
Unfortunately, we do not know if legislation will be enacted to extend these farm friendly provisions. However, throughout the remainder of 2012, these taxpayer friendly provisions will remain in effect. As the $5.12 million exemption may be used to transfer assets during life or at death, farmers who can afford to give their descendants significant gifts now can benefit from a shifting of post-gift appreciation to descendants by moving that appreciation out of the donor's taxable estate. In addition, gifts using discounts through family entities (such as family partnerships or family limited liability companies) are still advantageous.
With the dramatic increase in the value of agricultural land seen in most areas of Michigan the last few years coupled with high commodity prices, farmers who historically may not have had any estate tax concerns may now find themselves with a taxable estate. This will be especially true if the portability provisions and the increased exemption amount expire on December 31, 2012. With the possibility of an early fall harvest due to the warm and dry conditions experienced by many Michigan farmers, you should try to make some time yet this year to meet with your estate planning attorney and accountant to discuss options and opportunities that currently exist but may not be available in 2013 and beyond.© 2014 Varnum LLP