Lakin Spears, LLP 2013 and Tax Planning Update
Transfer Tax Fiscal Cliff Averted
The much-discussed fiscal cliff regarding transfer taxes was averted when the American Taxpayer Relief Act of 2012 (“ATRA”) was enacted on January 2, 2013. While the details of the Act are still being analyzed, of note, ATRA provides that the exemption amount from the federal estate tax (regarding transfers at death in 2013 and thereafter) is $5 million (indexed for inflation). Similarly, for gifts made after 2012, the exemption amount from the federal gift tax is $5 million (indexed for inflation). In addition, the exemption amount from the federal generation-skipping transfer tax (which generally applies for transfers made during lifetime or at death to someone two or more generations below the transferor) is also $5 million (indexed for inflation). Such exemptions, as indexed, will be $5.25 million for 2013. ATRA also increased the top tax rate regarding all of these taxes from 35% to 40%.
Further, for deaths in 2013 and thereafter, ATRA extends the ability of a surviving spouse to elect to transfer any of their deceased spouse’s unused estate tax exemption amount to the surviving spouse (this is called “portability” of the unused exemption). This allows surviving spouses to apply this “extra” exemption amount to gifts made during their lifetime and transfers made at their death (but not to shelter lifetime gifts/transfers at death from the generation-skipping transfer tax).
ATRA makes all of the above-referenced changes permanent. However, given the numerous changes in the tax laws in recent years, it would not be surprising if, at some future time, these provisions are once again revisited and changed by Congress.
It is important to remember that, although the estate, gift and generation-skipping transfer tax exemptions are set fairly high for the indefinite future, it may still be beneficial for some individuals to consider gifting during their lifetimes as a tax planning technique. In addition, there are and always have been many significant reasons to
create or update an estate plan which are unrelated to such taxes, including, but not limited to, planning for the disposition of assets at death in accordance with one’s wishes, avoidance of probate, planning for possible incapacity, charitable giving and the proper methods to do so, planning for children with disabilities, planning in second marriage situations, nominating guardians for minor children and nominating and appointing other legal representatives, and designating retirement account beneficiaries in an income tax efficient manner. In addition, planning to maximize the income tax benefits of an estate plan become even more relevant now, as does integrating portability into an estate plan as appropriate.
Qualified Charitable Distributions from IRA Extended
ATRA extended the Qualified Charitable Distribution from an IRA provision retroactive to January 1, 2012 and until the end of 2013. Therefore, under certain circumstances, individuals who are 70 ½ or older can make a distribution up to $100,000 per year from their IRA directly to an eligible charity and have such distribution excluded from their gross income. Until ATRA was enacted, this IRA charitable rollover provision was only applicable through December 31, 2011. In order to take advantage of this provision for 2012, one must take action by January 31, 2013.
Federal Annual Gift Tax Exclusion Increased to $14,000
The federal annual gift tax exclusion is the amount that an individual can gift each year to each donee free of federal gift tax. This exclusion applies to a gift to an individual donee to whom a gift would not otherwise be gift tax-free (for example, a gift to the U.S. citizen spouse of a donor is not subject to federal gift tax and therefore this exclusion would not be applicable to such a gift). The federal annual gift tax exclusion is $10,000, adjusted annually for inflation. The amount of this exclusion for 2013 is $14,000.
We encourage you to contact us to discuss how the above law changes may affect your estate plan. Happy New Year and wishing you all the best for 2013.
This publication is for general information purposes only and is not specific legal advice or a substitute for advice from qualified counsel. Pursuant to requirements related to practice before the Internal Revenue Service, we must inform you that any federal tax advice contained in this communication is not intended to and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter addressed herein.