ACTEC Estate and Gift Tax Committee October 20, 2012 Year-End Gift Tax Planning for 20121 By Carlyn S. McCaffrey McDermott Will & Emery I. Reasons to Make Gifts in 2012 There are three principal tax reasons to make substantial gifts before the end of the year. I. The gift tax credit for 2012 is at an historic high, $5,120,000 . It is scheduled to drop to $1,000,000 on January 1, 2013. If there is no "claw back" in the year of the 2012 donor's death, and if the credit amount is then lower than it is in 2012, the 2012 gift is likely to save substantial estate taxes because the 2012 gift will have locked in the advantage of the higher credit. 2. The donor will be able to use the $5,120,000 GST exemption to protect the gifted property from future generation-skipping transfer taxes. A claw back of the gift tax credit will not affect the level of GST exemption allocated to gifted property although the IRS could apply section 901 of the 2001 Economic Growth and Tax Relief Reconciliation Act of 2001 (the sunset provision) in a way that would significantly reduce the level of GST exemption allocated to a 2012 gift. 3. The income and appreciation earned on the gifted property will be removed from the donor's transfer tax base. If the gifted property is given to a grantor trust, the income and appreciation earned on the gifted property will be enhanced by the donor's payment of gift taxes. 2. The Claw Back Issue The term "claw back" refers to the apparent requirement in the current estate tax law as that the estate of a donor of a $5,120,000 gift in 2012 who dies in a year in which the applicable credit amount under section 2010 of the Code,2 must calculate her estate tax by including the 2012 gift in her estate tax base as an adjusted taxable gift and by reducing the tax due, not by the Carlyn S. McCaffrey October 2012 2 References to the "Code" are to the Internal Revenue Code of 1986, as amended. References to "section" are to sections of the Cod