Many estate planners, CPAs and valuation experts are busy right now assisting clients who are making extremely large gifts in an effort to maximize the current $5.12MM gift tax exemption. For those with large estates, the prospect of the gift/estate tax exemption amount defaulting back to the $1MM level as a result of the fiscal cliff is nausea inducing.
However, for many estates that are on the margin, serious consideration should be given to NOT making the gift. The reason why is that when the owner passes away, the value of the property owned will get a full date of death step-up in basis. So if farm property was bought or even inherited years ago (which means it has a low basis), is gifted now to children, the children would receive this property and will still have this low basis. That means that if the children turn around and sell the property they will be hit with a significant taxable capital gain.
Traditionally, it was much better to take the hit on capital gains in order to avoid the estate tax, but if one's estate is around $5MM and there is an intention to liquidate holdings after death, it may be better to only give away part of the property so that the other properties can get a step-up in basis at death.
If Congress keeps the estate/gift tax exemption high (as opposed to reverting back to the $1MM level) then there will be many instances where the 2012 gift giving was unnecessary and resulted in the loss of a step-up basis upon the owner's death.
While hind-sight is always 20/20, a little strategic planning can go a long way.
