Estate Planning After the American Taxpayer Relief Act

 

KEEPING YOU INFORMED…

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act (the “Act”). The Act does not contain any sunset provisions, so there is finally a degree of certainty regarding the federal transfer tax system. For the first time in years, you may now plan your estates without concern about imminent changes in the tax law.

The following is a brief outline of the federal estate, gift, and generation-skipping transfer tax provisions of the Act.

Tax Exemptions: The federal gift and estate tax exemption amounts that were scheduled to expire on December 31, 2012, will continue indefinitely. The exemption for both taxes will be fixed at $5 million, although they will be indexed for inflation. For 2013, the indexed exemption is $5,250,000 (up from $5,120,000 in 2012). If the Act were not passed, these exemptions would have been reduced to $1 million. Thus, individuals may transfer up to $5,250,000 during lifetime or upon death without the imposition of federal gift or estate tax.

The $5 million federal generation-skipping transfer tax exemption, as indexed, also will continue indefinitely, allowing individuals to provide significant generation-skipping transfers without the imposition of tax.

Tax Rates: The Act increases the top federal estate, gift and generation-skipping transfer tax rates from 35% to 40%. If the Act were not passed, the top rate would have increased to 55% in 2013. The top rate applies to transfers exceeding the exemption amounts as described above.

New York State maintains its separate estate tax with an exemption of $1 million and a top tax rate of 16%. Under the Act, state estate taxes will continue to be deductible for federal estate tax purposes.

Portability of Exemptions between Spouses is Extended Indefinitely: The Act extends indefinitely the portability of gift and estate tax exemptions between spouses. Portability makes it possible for a surviving spouse to utilize a deceased spouse’s unused exemption for future transfers, if the deceased spouse’s Executor so elects. Portability presents new planning opportunities which might be incorporated into Wills and Trusts. Portability is not available, however, for a deceased spouse’s unused generation-skipping transfer tax exemption.

Annual Exclusion Amount is Increased to $14,000: For 2013, the amount that is annually exempted from federal gift taxes, also known as the “annual exclusion,” has increased from $13,000 to $14,000. For example, an individual may gift up to $14,000 per year ($28,000 per year for married couples) to as many individuals as desired, without using any portion of the applicable lifetime gift tax exemption or incurring any gift tax liability.

Potential Future Legislation: Many of the most commonly used tools for wealth transfer planning (e.g., grantor retained annuity trusts, valuation discounts for closely-held business entities, intentionally defective grantor trusts and generation-skipping transfer tax exemption trusts, including dynasty trusts) had been targeted for adverse action by the Obama administration, but the Act did not eliminate these planning opportunities. There may be additional revenue raising legislation in the future. Thus, clients who might consider employing these techniques may wish to do so sooner rather than later.

Need to Review and Revise Existing Estate Plans: We recommend that you contact us to discuss whether you should amend your existing documents to take advantage of the greater flexibility available under the Act.

WE ENCOURAGE YOU TO CONTACT THIS OFFICE SO THAT WE MAY REVIEW YOUR EXISTING ESTATE PLAN OR CREATE AN ESTATE PLAN FOR YOU IF YOU PRESENTLY DO NOT HAVE ONE.

TAX ADVICE DISCLOSURE: THIS WRITTEN COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND IT SHOULD NOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER. THE FOREGOING LEGEND HAS BEEN AFFIXED PURSUANT TO U.S. TREASURY REGULATIONS GOVERNING TAX PRACTICE.

 

THIS MEMORANDUM IS MEANT TO ASSIST IN GENERAL UNDERSTANDING OF THE CURRENT LAW AND MAY CONSTITUTE ATTORNEY ADVERTISING. IT SHOULD NOT BE REGARDED AS LEGAL ADVICE. THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.

© Lamb & Barnosky, LLP, 2013