ESTATE PLANNING AFTER THE NEW TAX CHANGES
2012 Tax Act
By: Sandra L. Clapp, Esq.
Since 2001, the estate planning process has been more difficult because of uncertain federal estate and gift tax laws. The challenges began first with an estate tax “repeal” that was only to occur in 2010. In December 2010 (after almost a full year of estate tax “repeal”), Congress adopted a short term fix that renewed the estate and gift tax laws at a higher exemption amount only through December 31, 2012. The estate and gift tax laws adopted in 2010 provided for a $5,000,000 per person combined estate and lifetime gift tax exemption, which was indexed to $5,120,000 in 2012. Without action by Congress, the estate and gift tax exemption was automatically to return to $1,000,000 on January 1 of this year. On January 2, 2013, the American Taxpayer Relief Act of 2012 (the “2012 Act”) was signed into law. The 2012 Act has finally put into place “permanent” estate and gift tax changes (of course, it is only “permanent” until Congress decides to change the law again). The 2012 Act has now established a more predictable framework for estate and gift tax planning and has generally continued the favorable 2010 laws.
- Annual Gift Exclusion. Under current federal law, each individual can make a gift to another of $14,000 each calendar year without filing a gift tax return and without the recipient reporting the gift on his individual income tax return. There is no limit on the number of annual exclusion gifts an individual can make and every year the ability to make these gifts is renewed. The person making the gift cannot take a deduction for the gift on their personal tax return and the person receiving the gift does not report the gift. In essence, the gift is disregarded for tax filings.
- Gifts Over Exclusion. If the value of the gift exceeds the annual exclusion limit, the person making the gift must file a gift tax return (IRS Form 709). Any amount over the annual exclusion is a “taxable gift.” The lifetime gift tax exemption under current federal law is presently $5,250,000 (the 2013 exemption amount). No gift tax will be paid on the taxable gift so long as all taxable gifts do not exceed the lifetime exemption. However, any use of the lifetime gift tax exemption will reduce the amount of the exemption available at death. Many gifts may be protected by the lifetime exemption so even if a gift tax return is filed there will be no tax paid.
- Estate Tax at Death. Under the 2012 Act, the estate tax exemption remained at the 2010 amount of $5,000,000 indexed in years thereafter. The indexed amount of the estate tax exemption in 2013 is also $5,250,000 (if not previously used for lifetime taxable gifts discussed above). The only change in the 2012 Act from 2010 is that the highest estate/gift tax rate was increased from 35% to 40%. The 2012 Act also continued the concept of “portability” which is the ability of the surviving spouse to retain the estate tax exemption of the first spouse to die by filing an estate tax return. Under the law prior to 2010, in order to protect the estate tax exemption on the death of the first spouse an irrevocable trust was normally established which could provide complication and cost to the survivor.
- Planning Actions. Many wills and trusts drafted prior to 2010 incorporate trusts or other estate planning distributions that are based upon outdated estate tax exemptions. The use of such trusts may not be required for estate tax purposes, although non-tax reasons may still exist (such as protection against remarriage). Any estate planning documents executed prior to 2010 should be reviewed to make sure the distributions set forth therein are appropriate based upon the current estate tax laws, size of the estate, and intent. A plan that does not fit the current circumstances of the individual can be as harmful as having no plan at all.
The foregoing article is not intended to replace legal advice and should be used only for informational purposes.