Estate Planning in 2013 and Beyond

The recent tax legislation dealing with the “fiscal cliff” included revisions to the estate tax law that will affect estate planning for the foreseeable future. These include:

  • The federal gift, estate and generation skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for Americans; for more than ten years, we have been planning with uncertainty under legislation that contained expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have some certainty with which to plan.
  • The federal estate and gift tax exemption will remain at $5 million per person, adjusted annually for inflation. This means that the opportunity to transfer large amounts during lifetime or at death remains. Also, with the amount tied to inflation, you can expect to be able to transfer even more each year.
  • The generation skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption be “permanent” will allow you to take advantage of planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, 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. When one spouse dies, “portability” permits the executor of the estate to transfer any unused exemption of the deceased spouse to the surviving spouse. But problems remain. For example, say Sue married Tom after Bob dies; if Tom dies before Sue, she will lose all of Bob’s unused exemption. In addition, by leaving everything to Sue, Bob has no control over his share of their estate; Sue can do whatever she wants with the assets, including disinheriting Bob’s children from a previous marriage. There is also significant cost to using the “portability” provision because it requires filing an estate tax return. For these and other reasons, traditional trust planning, which uses both spouses’ estate tax exemptions, remains the best option for most married couples.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased to $14,000.

In addition, there are several changes to income taxes, including several income tax increases that can be mitigated by proper planning:

  • The payroll tax holiday ended, so everyone has a decrease in net pay.
  • Ordinary income tax rates increase from 35% to 39.6% for singles earning more than $400,000 a year ($450,000 a year for married couples).
  • There is a .9% tax increase on ordinary income over $200,000 for singles ($250,000 for married couples), thanks to the health care bill.
  • The top capital gains and dividend rate increased to 20% for those earning more than $400,000 a year ($450,000 for married couples).
  • There is an additional 3.8% tax on investment income for those earning more than $200,000 ($250,000 for married couples), thanks, again, to the health care bill.
  • The AMT exemption is now permanent. It increased to $50,600 for single and to $78,750 for married taxpayers, with the exemption and phase out amounts indexed.
  • Several business provisions were extended, including the R&D tax credit, work opportunity tax credit, accelerated depreciation, and Section 179 levels. (Business owners will want to consult their CPAs for advice.)

For most Americans, the recent tax legislation has removed the emphasis on estate tax planning and put it back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want. If you are tempted to skip estate planning because your estate is less than the $5 million range, remember that proper planning can:

  • Avoid state inheritance/death taxes that have lower exemptions than federal taxes;
  • Avoid probate, which can be quite expensive and time-consuming in some states;
  • Ensure your assets are distributed the way you want;
  • Protect an inheritance from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  • Provide for a loved one with special needs without losing valuable government benefits;
  • See that control of your assets remains in the hands of the person you trust most;
  • Provide for minor children or grandchildren;
  • Help protect assets from creditors and frivolous lawsuits (especially important for professionals);
  • Protect you, your family and your assets in the event of incapacity; and
  • Help you create meaningful charitable gifts.

For those with larger estates, ample opportunities remain to transfer large amounts tax-free to future generations. But with the increase in estate and income tax rates, it is critical that professional planning begins as soon as possible. Also, with Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.

If you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over. Now that we have some certainty with “permanent” laws, there is no excuse to postpone your planning any longer.

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