The estate and gift tax law is constantly changing.  In 2012, this law is very favorable for anyone inclined to make gifts to family members or friends.  Generally, any transfer of cash or other assets that you make to another person without consideration during your lifetime is subject to gift tax and the requirement that you file a gift tax return to report the gift.  However, there are several exceptions to this general rule, as follows:

 1.  Annual Exclusion Gift. Under the annual gift tax exclusion, you can give up to $13,000 as a present interest gift in each calendar year to as many people as you desire free of gift tax. In fact, Bill Gates could stand on a street corner in Seattle and hand out $13,000 to every person who passes him on the street and he would not have to pay any gift tax or file a gift tax return. A married couple can jointly give each of their children (or any other person) $26,000. If, however, you give a person more than $13,000 in 2012, even if it is only $13,001, you have to file a gift tax return.

 2.  Unlimited Marital Deduction for Gifts to a U.S. Citizen Spouse. You can give as much as you want  to a U.S. citizen spouse outright or in a special type of marital trust, all of which is excluded from gift taxes by the unlimited marital deduction for transfers of assets between spouses.  Please note that federal law at this time does not recognize same sex marriages for tax purposes; so, a federal marital deduction is not available for married same sex spouses.

 3.  Annual Exclusion Gift to a Non-U.S. Citizen Spouse. You can give your non-U.S. citizen spouse up to $139,000 each year free of gift tax. This gift is not in addition to the $13,000 annual exclusion gift mentioned above. As noted above, federal law does not recognize same sex marriages for federal tax purposes; as such, this exception to the gift tax law does not apply to a non-citizen spouse in a same sex marriage.

4.  Medical Expenses. You can pay another person’s medical expenses directly to the medical provider. This exception to the gift tax law does not apply if you reimburse the person who paid for the medical expense.  You must directly pay the medical provider.

 5.  Tuition Expenses. You can pay another person’s educational tuition expenses directly to the educational institution. Just like the exception for payment of medical expenses, this exception to the gift tax law does not apply if you reimburse the person who paid the tuition. You must directly pay the educational institution.

 6.  Gifts to Charitable Organizations.  You can give an unlimited amount to a qualified charitable organization, all of which is excluded from gift taxes by the unlimited charitable deduction.

7.  Gifts to Political Organizations. You can give an unlimited amount to a political organization for its purposes.

In addition to the exceptions to the gift tax law listed above, under current law, there is a “gift tax exemption” that allows you to transfer property with a value of $5,120,000 to another person during your lifetime without having to pay gift taxes. This is a cumulative exemption, so it applies to all gifts made by a person during his or her lifetime, not just gifts made in 2012. In any year that you make gifts that exceed the exceptions to the gift tax law (noted above), you must file a gift tax return to report the gifts to reduce the gift tax exemption available to you. To the extent that your gifts exceed the the exceptions to the gift tax laws (noted above) and your gift tax exemption ($5,120,000 in 2012), a 35% gift tax is imposed on the gifts.

At the end of 2012, there will be a change in the gift tax law. Currently, there appears to be two possible directions the gift tax law will take as of January 1, 2013. The first direction is that the current gift tax law will sunset and the gift tax law as it existed in 2000 will be reinstated with a $1,000,000 gift tax exemption and a top tax rate of 55%. The second direction is set forth in proposed legislation offered by President Obama providing for a $1,000,000 gift tax exemption and a top tax rate of 45%. Both options are substantially less attractive than the current 2012 gift tax law.

The current gift tax exemption of $5,120,000 and the 35% gift tax rate presents a great opportunity for you to transfer substantial assets to your family members free of gift tax. However, even if you make gifts that exceed the $5,120,000 gift tax exemption amount, the 35% gift tax rate on these gifts is lower and more favorable than the scheduled 55% gift tax rate that may be in force in 2013. Furthermore, to the extent that you make these tax favored gifts, the value of the gifted assets and the appreciation on those assets are removed from your estate for estate tax purposes.

The only thing we know for certain about the gift tax law is that the $5,120,000 gift tax exemption and the 35% gift tax rate are in effect until the end of 2012. Accordingly, you should consider prompt action before the end of the year to take advantage of the planning opportunities provided by the $5,120,000 gift tax exemption.

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com