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    Mar 19 12

    Maximizing Gift Tax Exemption May Set Monsters Loose

    Newport Beach Law Firm

    If you have not used up your unified credit yet there is a pretty compelling case for making a large gift in 2012.

    Lately, writing about estate law is a lot like writing commentary on a monster movie. This estate law “monster” could be known as the dreaded “Unknown 2013.” It’s the unseen and unknowable creature that lurks just after the upcoming election, after the expiration of current laws, and, most ominously, just after the fall of the New Year’s globe in Times Square. But that’s not the sole monster on the loose. No, its terrible twin should be known as dreaded “Clawback” on 2012 gifts.

    The legal community itself is not entirely certain what Clawback is, if it actually will rear its ugly head, or just how to plan for it, but it’s nonetheless an instructive concept. The latest warning came out over at Forbes and so I thought it was worth sharing.

    As a monster, the Clawback is something of a ghost in that it haunts people from the grave and does so because of decisions made during life, and yes, it is the offspring of the Unknown 2013. To drop the comparison, “Clawback” is the effect of estate laws that unify the gift tax exemptions and the estate tax exemptions, and the other estate laws that change those amounts based on congressional whim or the party in charge during that cycle.

    For example, if you made a mega gift in 2012 and under 2012 laws (the lifetime gift tax exemption is $5.12 million this year), but then died in 2013 and under 2013 laws (the “default” is $1 million) when the exemption may be much lower, then you may have used up the entire exemption simply because the laws keep changing! And, to make matters worse, the taxes will kick in and “clawback” those assets that were gifted upon the beneficiaries of your largesse to pay for the tax that was generated at death. That’s bad enough, but what if yours is a blended family? What if the beneficiary inheriting your estate at death and paying the estate tax was not the same beneficiary receiving your mega gift while you were alive? What if your “inheriting” beneficiary and your “gifting” beneficiary don’t like one another? That’s an unfortunate tinder box.

    It is hard to pin down whether these twin monsters will show up and, if they do, what form they will take (they are master “shape-shifters”). The point is that there are ways of planning that avoid this potential pitfall. If you’re savvy enough to take advantage of 2012 gift laws, then you’re savvy enough to see your planning through.

    Reference: Forbes (March 12, 2012) “Should Threat of Clawback Discourage 2012 Mega Gifts ?”

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