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 tax law is a lot like writing commentary on a monster movie. This estate tax law “monster” should 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 it is 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. Yes, it is the offspring of the Unknown 2013. To drop the comparison, “Clawback” is the effect of estate tax laws that unify the gift tax exemptions and the estate tax exemptions, and the other estate tax 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 but then died in 2013 when the exemption may be much lower (i.e., $1 million), 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 previously gifted to compute the tax that is 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. However, it would be wise to check out the above article as preparation for what could occur.
Reference: Forbes (March 12, 2012) “Should Threat of Clawback Discourage 2012 Mega Gifts ?”
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