Part II – Time is Running Out (gifting for the rest of 2012)

This is my second post dealing with the generous $5.12 million gift exemption under federal law that is slated to expire beginning January 1, 2013.

There is some intriguing and, in my view, relevant commentary among tax practitioners about using an enforceable promise to make a gift in order to use this year’s $5.12 million gift exemption.  For example, two lawyers at Milbank Tweed (Austin Bramwell and Lisi Mullen) published a very good, thought-provoking piece on the subject of a donative promise (See Steve Leimberg’s Estate Planning Newsletter, dated August 23, 2012, entitled “Bramwell and Mullen: Donative Promise Can Use Up Gift Tax Exemption”).

Particularly for a married spouse who cannot afford during 2012 actually to part with $5.12 million, it does appear to me that the gift of a promise to give away $5.12 million can suffice for using this year’s gift exemption.

My view is that this gift promise must be set out within an enforceable postnuptial agreement.  More specifically, under the terms of this agreement one spouse promises to fund a spousal trust for the other spouse.  The actual funding of the trust can occur later (including after January 1, 2013) when the spouse has property sufficient to put in the spousal trust as required under the postnuptial agreement.  The state law will have to allow these types of postnuptial agreements (not all states allow them), 

This $5.12 million donative promise, of course, also will have to be reported on the spouse’s 2012 gift tax return Form 709 to reflect use of this year’s $5.12 gift exemption.

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