The recent tax legislation dealing with the “fiscal cliff”
included significant revisions to the estate tax law that will affect estate
planning for the foreseeable future. These revisions include:
* The federal gift, estate and
generation-skipping transfer tax provisions were made permanent as of December
31, 2012. This is great news because, 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
* The federal gift and estate tax exemption
will remain at $5 million per person, adjusted annually for inflation. In 2012,
the exemption (with the adjustment) was $5,120,000. The amount for 2013 is
expected to be $5,250,000. This means that the opportunity to transfer large
amounts during lifetime or at death remains, so those who did not take
advantage of this in 2011 or 2012 can still do so. Also, with the amount tied
to inflation, more assets can be transferred 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
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
now be “permanent” allows for planning that will greatly benefit future
* 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. This allows the unused exemption of the first spouse to die to transfer
to the surviving spouse, without having to set up trust planning specifically
for this purpose. However, there are still many benefits to using trusts,
especially for those who want to ensure that their estate tax exemption will be
fully utilized by the surviving spouse.
* Separate from the new tax law, the amount
for annual tax-free gifts has increased to $14,000.
Therefore, for most Americans the 2012 Tax Act has removed
the emphasis on estate tax planning
and put it back on the real reasons to do estate planning: taking care of
ourselves and our families the way we want. Those who might be tempted to skip
estate planning because their estates are less than the $5 million range should
remember that proper estate planning provides peace of mind by allowing
* 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 their assets are distributed the way
* Protect an inheritance from irresponsible
spending, a child’s creditors, and from being part of a child’s divorce
* Provide for a loved one with special needs
without losing valuable government benefits;
* See that control of their assets remains in
the hands of a trusted person;
* Provide for minor children or grandchildren;
* Help protect assets from creditors and
frivolous lawsuits (especially important for professionals);
* Protect themselves, their family and their
assets in the event of incapacity; and
* Help 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. Thus, it is best to
put these strategies into place now so that they are more likely to be
grandfathered from future law changes.
For those who 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 planning any longer.
If you have questions or require counsel, please contact our Menlo Park Estate Planning Attorneys.