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Taxes and Estate Planning in 2013

January 14, 2013 Douglas Davis

As you probably know, Congress avoided the so-called fiscal cliff by passing the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), signed into law by the President on January 2, 2013. The 2012 Tax Act makes several important revisions to the tax code that will affect your estate plan for the foreseeable future. Some of those changes are as follows:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012, or at least until Congress decides to make additional revisions. For more than ten years, we have been planning with uncertainty under legislation that contained built-in expiration dates, so the new law should provide a measure of stability in the near future.
  • The federal gift and estate tax exemptions will remain at $5 million per person, adjusted annually for inflation. This means that in 2013 the exemption will be $5,250,000 per person, and the opportunity to transfer large amounts of your assets tax free during lifetime or at death still remains.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption. This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at death) to grandchildren and others who are more than 37.5 years younger than the transferor; in other words, transfers that “skip” a generation.
  • With proper estate planning, married couples can take advantage of the higher exemptions and, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to using trusts, especially for those who have blended families, or want to ensure that their estate tax exemption will be protected from predators, and fully utilized by the surviving spouse.
  • The amount for annual tax-free gifts has also increased from $13,000 to $14,000, meaning you can give up to $14,000 per beneficiary, per year without having to file a gift tax return.  That annual exemption is also free of federal gift, estate and GST tax and does not reduce your lifetime ($5 million) gift and estate tax exemption. By making annual tax-free transfers while alive, you can transfer significant wealth to your children or grandchildren, thereby reducing your taxable estate and removing future appreciation on transferred assets.   If you want to further enhance a lifetime giving strategy, consider transferring interests in a limited liability company or similar entity to loved ones because these assets have a reduced value for transfer tax purposes.

For those with larger estates many opportunities remain to transfer large amounts tax free to future generations, but it is critical that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.