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Gift Tax and Clawback

Peter Reilly in Forbes discusses the possibility of clawback and how making substantial gifts in 2012 is still a good idea.

. . .  the inertia of the law as it is now written and the unlikelihood of a Republican sweep make it likely that the unified credit will cover significantly less than $5,000,000 in 2013.  Unless I missed a beat somewhere in the last thirty years, I don’t think that the unified credit equivalent has ever gone down.  That would account for nobody being sure exactly how the estate tax computations will work for someone who makes a mega gift in 2012 when the credit covers $5,000,000 and then dies in 2013, when the credit covers $1,000,000.  Here is an excerpt from Chuck Rubin’s explanation of the potential problem:

If correct, this means that when a donor later dies, and substantial 2011 or 2012 gifts are added into his or her estate tax computation, the constructive gift tax reduction applied to the tentative estate tax will be low – and there will not be a corresponding high unified credit amount available for estate tax purposes to offset this enhanced tax. Thus, in effect, this statutory analysis recaptures some of the gift tax that avoided tax at the time of the gift under the then-available unified credit, as estate tax due at death.

Got that.  Right.  Well, I hate to say it, but I can’t figure out how to make it any clearer. At the risk of gross oversimplification I’ll speculate that someone who is left with a $3,000,000 estate after having made a $5,000,000 mega gift might have estate taxes computed as if the estate were $7,000,000, which conceivably could wipe out the estate.  Does that make the mega gift a bad idea ? It does not.  I’ll steal from Mr. Rubin again:

Nonetheless, even with clawback, the benefits of a larger 2012 gifts remain. These include (1) enhanced GST exemption for generation-skipping gifts or gifts to trusts that may later have a skip, (2) shifting of appreciation in gifted assets to third parties after the gift that would not otherwise occur (which may provide future estate tax savings), and (3) in many circumstances overall tax savings may still result, even with clawback. Thus, while clawback at worst may reduce benefits of 2012 gifting, enough remain that it may still make sense in many situations.

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