The American Taxpayer Relief Act of 2012 enacted on December 31, 2012 was publicized as reducing income tax rates for all but the most wealthy Americans, but surprisingly the main provisions of the federal estate tax survived intact.
As of January 1, 2013, the federal estate and gift tax law now includes the following:
- Imposes the Estate and Gift Tax at a flat rate of 40% (increased from 35%).
- Maintains a $5,000,000 “Applicable Exclusion Exemption,” $10,000,000 for married individuals.
- Maintains a $5,000,000 gift tax exemption unified with the Applicable Exclusion Exemption.
- Indexes the Exclusion Exemption for inflation, making the Exemption amount for 2013 approximately $5,250,000.00.
- Imposes the Generation Skipping Tax rate at 40% (increased from 35%) with a $5,000,000/$10,000,000 exemption.
- Maintains “Portability” between spouses to maximize their use of the $10,000,000 Applicable Exclusion Exemption.
- Continues the stepped-up tax basis for heirs, allowing the avoidance of income and capital gains taxes for estates.
The above and other provisions of the law have the greatest impact on estates valued at over $5,000,000/$10,000,000, particularly a plan maximizing the new portability and gift tax provisions. Even estates expected to be valued at less than $5,000,000, generally not subject to the federal tax, can also benefit by preparing a more streamlined estate plan and taking advantage of several other provisions. Ironically, individuals who gifted assets, such as real property or shares in a business, expecting Congress to reduce the Applicable Exemption may have inadvertently created future income tax issues for the recipients of those gifts.
While tax considerations are important in estate planning, the most important reason to have an estate plan is to ensure that your assets are available to care for your heirs and dependents as you deem appropriate and to minimize costs and delays of property transfers after death. Proper planning not only eliminates much of your worry, but often pays for itself in tax and other savings, particularly when it is paired with your retirement and business succession plans.
At Brooks, Tarulis & Tibble, LLC we have substantial experience in estate planning and can modify, update or draft your existing plan to take advantage of the new tax law. If we can help you in this matter, please do not hesitate to contact us.
Douglas C. Tibble
Kevin M. Gallaher