2011 and 2012 presents an extraordinary opportunity for wealthy taxpayers to transfer wealth to future generations without paying gift or estate tax. At least for 2011 and likely for 2012, $5 million can be transferred free of tax. There are additional strategies which can leverage the $5 million and allow taxpayers to transfer significantly greater amounts.
In making gifts, although no gift tax may apply if the gifts are under $5 million (or $10 million for a married couple), there is still a need to file a gift tax return. Gift tax returns are necessary if a gift to any one person exceeds $13,000 per year. A gift tax return may also be necessary if assets are transferred by a married couple and the couple "gift splits," meaning the assets are owned by one spouse but the other spouse agrees to use his or her gift exemption.
Recently, The Wall Street Journal reported that the IRS is auditing state property tax records to determine whether taxpayers are making gifts but not properly reporting the gifts. According to the May 26, 2011, The Wall Street Journal, the IRS audited 323 taxpayers over the last two years by reviewing state property records and discovered that 97 had failed to report gifts on the IRS Form 709. Of those 97 cases, twelve resulted in taxes or penalties for making gifts exceeding the exemption amount. Among the states complying with the IRS request for information are Virginia, Florida, New York and twelve others.
The bottom line: take advantage of the law while the opportunity is present to remove significant wealth from your estate but do not forget filing the gift tax return.