On January 2, 2013, President Obama signed the American Taxpayer Relief Act. The income tax provisions of the law have received a lot of press, but the Act also impacts significantly on gift, estate and generation-skipping tax. Under the Act, the exemption from estate and gift tax, and the generation skipping tax exemption, are set at $5,000,000 with an inflation adjustment, so that for gifts made in 2013 and individuals who die in 2013, the exemption is $5,250,000. For a married or same-sex couple, the exemption for both spouses/partners in combination is $10,500,000. Therefore, individuals who did not take advantage of the $5,000,000 exemption in 2011 or the $5,120,000 inflation-adjusted exemption in 2012, can do so this year or in coming years. Individuals who consumed their exemptions in 2011 or 2012, can make additional gift-tax free gifts to take advantage of the inflation-adjustment between 2012 and 2013 which increased the exemption by $130,000 per donor.
The Act also increased from 35% to 40% the rate on taxable gifts, taxable estates and non-exempt generation-skipping transfers.
The estate, gift and generation-skipping tax changes included in the Act do not "sunset" and are therefore treated as "permanent."
The Act also makes permanent the so-called "portability" of the estate tax exemption between spouses. This means that any portion of the exemption which the first spouse to die or his or her estate does not consume, can be made available to the surviving spouse for lifetime gifts and at death. While this feature of the estate and gift tax rules can avoid an unintended wasting of the exemption for a married couple, we recommend that married couples who may be subject to federal estate tax consult an estates practitioner to make sure that their wills and other estate planning documents are drafted, and assets are properly titled between husband and wife, to maximize use of the exemptions, regardless of the order in which husband and wife die.
Finally, the Act permanently eliminates the so-called state death tax credit and replaces it with a federal estate tax deduction equal to state death taxes paid. The credit had served, in effect, as a means for channeling death taxes from the United States Treasury to the state or states in which the decedent died a resident or died owning real estate (for example, a vacation home). The credit did not increase the decedent's estate's total tax liability - only changed the payee. With the elimination of the credit (which began on a temporary basis in 2005) many states have imposed and will continue to impose an estate tax equal to the credit, but without the offsetting credit for federal estate tax. This means that without the credit, the aggregate cash outlay for death taxes is increased. We recommend, therefore, that state death taxes be considered as part of every estate plan.
Many clients whose estates are unlikely to be subject to federal estate tax in light of the increased estate and gift tax exemption, may want to simplify their wills and other estate planning documents to eliminate components of the documents that no longer apply. Clients who may be subject to federal estate tax should consult with an estates practitioner to determine if their estate planning documents need to be updated in light of the $5,000,000 inflation-adjusted exemption being made permanent.
Unrelated to the Act, the federal gift tax annual exclusion has been inflation-adjusted for gifts made in 2013 to $14,000, from the $13,000 exclusion which had applied for several prior years. Husband and wife and each partner in a same-sex couple can now give $14,000 each to one or more family members and other individuals. With gift-splitting, husband or wife alone can give $28,000 to one or more family members and other individuals.
Please contact any member of Montgomery McCracken's Trusts and Estates Section identified below if you have any questions about how the American Taxpayer Relief Act may impact on you and your family, or concerning any other aspect of your estate planning.