The American Taxpayer Relief Act of 2012, which Congress passed on New Year’s Day, contains the first "permanent" federal estate and gift tax provisions in 12 years. Of course, in Washington, DC, "permanent" only means until Congress changes the law, yet again. For now, this legislation has brought some certainty to estate planning.
Although the American Taxpayer Relief Act (ATRA) simply left many laws in place, without the passage of ATRA, the Federal Estate Tax exemption amount (referred to as the "basic exclusion amount") would have reverted from $5 million to $1 million per person, and the rate of tax would have risen from 35 percent to 55 percent.
Highlights of the new law, as it pertains to the Federal Estate and Gift Tax, include:
The Federal Estate and Gift Tax exclusion will remain at $5 million, indexed for inflation since 2011, making it $5.25 million for 2013. A husband and wife can continue to give or bequeath an unlimited amount of property to each other free of the Federal Estate and Gift Tax.
The Generation-Skipping Transfer (GST) Tax exemption also remains at the same level, $5.25 million, after adjustment for inflation. This tax is in addition to the Federal Estate and Gift Tax. In general, it is imposed on the transfer of property, by lifetime gift or at death, to grandchildren and others who are more than 37.5 years younger than the donor/decedent.
The maximum Federal Estate and Gift Tax rate is 40 percent (up from the 35 percent rate of 2010-2012, but less than the scheduled 55 percent rate). This is the single biggest change in the estate and gift tax law from 2012.
The law allowing for "portability" of the federal estate tax exemption between spouses has been made permanent.
As a result of the new federal legislation, we avoided the return of the New Hampshire Estate Tax. However, many other states do have a gift and/or estate tax (including Massachusetts, Maine, Connecticut and Vermont).
Certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) have been made permanent, such as the deduction for state death taxes, certain extensions to pay the federal estate tax under IRC section 6166 and certain GST "simplification" provisions.
What Does It Mean?
The $5 Million Basic Exclusion Amount. The $5.25 million (inflation adjusted) exclusion applies per person, which means that a married couple can effectively transfer at death $10.5 million to others, free of the federal transfer tax.
The same "basic exclusion amount" is available for lifetime gifts. To the extent this exclusion amount is used during life, it is not available to shelter assets at the donor’s death from the federal estate tax. If gifts during one’s life exceed the basic exclusion amount they are subject to the same 40 percent tax rate applicable to estates.
Portability. Historically, an individual’s basic exclusion could only be applied to his/her property. The unused portion of the basic exclusion amount evaporated at their death, and was therefore unavailable to the surviving spouse. Under the Tax Relief Act of 2010 the concept of portability was created.
Under this law, if a husband or wife dies and does not use his or her entire federal estate tax exclusion amount, then the "Deceased Spouse’s Unused Exclusion Amount," often referred to as the DSUEA, is available for the survivor’s estate. The DSUEA can also be used by the surviving spouse for lifetime gifts, having the potential for substantial tax saving. IRS regulations clarify when and how "portability" is to be applied.
Although portability may be helpful where the balancing of a couple’s assets has not taken place, it is not the planning tool of first choice as it will likely not maximize the estate tax savings. Most estate planners will want to continue to balance assets and use Credit Shelter Trust planning.
Assisting Clients in 2013
There are three basic ways in which estate planners can assist their clients in 2013: 1) address traditional elements of estate planning; 2) follow through on 2012 events and actions; and 3) take advantage of the sophisticated tools at hand while they last.
The following traditional elements of estate planning will be relevant to all clients regardless of their levels of wealth:
Ensure assets will be distributed as the client intends.
Identify and plan for assets in other states that could require ancillary administration or trigger a state estate tax.
Guard against spendthrift beneficiaries and protect assets from creditors.
Address the special needs of beneficiaries without jeopardizing governmental assistance.
Create or update Advance Directives and Durable Powers of Attorney.
Help identify appropriate individuals to serve in key roles as executor, trustee, trust advisor, guardian and agents.
Take advantage of the annual exclusion for gifts of $14,000 or less and the combined giving of a husband and wife.
Help establish meaningful charitable gifts and bequests, to name a few.
Follow through on actions taken in 2012. If gifts were made in 2012 in anticipation of the possible reversion of the basic exclusion amount to $1 million, was it done in a rush? Does it merit a second look?
For example, if low-basis assets were used to make a gift to an irrevocable trust at year end, these assets will not receive a step up in basis on the donor’s death. Consider exchanging high-basis assets for the low-basis assets, if the trust and applicable law so allow. If the trust was created in haste at year end, are there non-material provisions that should be cleaned up now by settlement agreement pursuant to New Hampshire’s Uniform Trust Code?
Because many gifts were made in 2012, consider whether Gift Tax Returns (Form 709) should be filed. Practitioners will need to work with clients and appraisers to be sure reporting requirements are met and to start the statute of limitations running for valuation purposes.
Consider filing a Federal Estate Tax return (Form 706) in 2013 for 2012 decedents, to elect portability, even if a 706 would not otherwise be required.
Opportunities may be lost. The Obama administration has made no secret of its desire to do away with, or limit, some sophisticated tools of estate planners. Among these are defective grantor trusts, certain valuation discounts, GST-exempt dynasty trusts and Grantor Retained Annuity Trusts.
Often, limiting legislation as is being considered by the administration will grandfather existing estate plan instruments. We will continue to provide sophisticated estate tax planning for the wealthy, but perhaps with fewer tools. Practitioners should consider whether the opportunity to use such tools remains and discuss these opportunities with their clients, along with the attending risks.
Tina Annis and Jeffrey Zellers are the founding members of Annis & Zellers PLLC in Concord. Their practice includes estate planning, elder law, tax, and business law. Find out more at www.anniszellers.com or on Facebook.