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Basics of Estate Planning

Estate Tax Considerations

Part of the estate planning process is devoted to minimizing transfer taxes, including state and federal estate tax (applicable to taxable estates of a decedent), gift tax (applicable to certain lifetime transfers), and generation skipping transfer tax (applicable to some transfers that directly skip a generation).

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law (the “2012 Act”). The new federal law includes estate and gift tax changes that will remain in effect without a future “sunset” or automatic change which has been contained in several of the recent laws creating uncertainty for estate planning. The 2012 Act continues most of the estate and gift tax provisions that have been in effect since 2010. The federal estate tax exemption will be indexed from $5,000,000 which was in effect in 2010. In 2013, the indexed amount of the estate tax exemption for each person is expected to be $5,250,000. The top estate or gift tax rate was increased to forty percent (40%) for persons dying after December 31, 2012. These changes only apply to federal estate tax and will not impact the possibility that separate state inheritance or estate taxes apply to assets of a decedent upon death. Currently Idaho does not have a separate inheritance tax.

Under law prior to 2010, to protect the exemption or credit of the first spouse to die, an irrevocable trust was generally established to receive and hold assets from the decedent’s estate (often referred to as a “bypass trust” or “credit shelter trust”). One of the changes of the 2010 law that was continued in the 2012 Act allows the surviving spouse to benefit from any unused exemption of the deceased spouse (a new concept known as “portability”). Upon death of the second person, the estate of the second spouse will receive the benefit of the unused exclusion of the first spouse to die. This change, combined with the higher permanent estate tax exemption, may have significant impact on any estate planning documents that utilize a “bypass” trust that is tied to the federal estate tax exemption. While there may be non-tax reasons to establish an irrevocable trust upon death of the first spouse (such as protection of children from a prior marriage or assistance with asset administration), the portability of the exemption provides greater planning flexibility.

Under the federal gift tax, each individual can currently transfer $14,000 per gift recipient each calendar year which is excluded from gift tax. Thus, for a married couple, they can together transfer $28,000 in property value, per recipient, each calendar year. These excluded lifetime transfers are useful to gradually reduce the total value of a gross estate without incurring gift tax consequences. The gift tax exemption for lifetime transfers above the annual exclusion remained unified with the estate tax exemption under the 2012 Act. Thus, the current lifetime gift tax exemption is presently estimated at $5,250,000 per individual and will be indexed to be the same amount as the estate tax exemption. The amount of any lifetime exemption that is utilized through taxable gifts will reduce the total amount of the exemption available at the time of death.

Because of the complexity of the current estate tax laws, before taking any action on the above matters, it is important that you consult with your legal and financial advisors to consider your particular testamentary documents and planning circumstances.


  Updated 01/07/13

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Note: This document is provided for informational purposes only. While every effort has been made to ensure its accuracy, it should not be relied upon as legal advice in individual situations. Please consult your legal advisor for personalized information.


 
 
 
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