The New Year has arrived with all of its attendant changes. Although Congress couldn’t seem to get its act together until after the deadline passed, they have ultimately settled on a few things, which is very good news for those of us who are trying to understand what our options are. Here is a quick summary of some of the highlights of the 2013 American Taxpayer Relief Act that are particularly relevant to our clients:
● The gift and estate tax exemption amounts will be at least $5.12 million per person. This amount will likely go up this year to $5.25 million due to inflation adjustments. Thus, an individual may still gift or devise as much as $5.25 million without incurring any transfer tax liability.
● The estate tax rate changed from 35% in 2012 to 40% in 2013 for those who die having more than the $5.25 million in their estates. This means that if your estate is larger than this, additional planning strategies will need to be implemented to avoid paying the IRS $0.40 on the dollar for every dollar over this amount when you die.
● “Portability” will remain between spouses on the use of their estate tax exemption. This means that a surviving spouse can use the other spouse’s unused estate tax exemption if the $5.25 million is not sufficient at the second spouse’s death. However, portability is not automatic as the surviving spouse must make this election on a Form 706 after the first spouse’s death. Such a filing must be made shortly after the first death or this benefit may be lost. Although this benefit is certainly a good thing, it can lull people into a false sense of security regarding their estate tax liability and prevent them from doing the kind of planning that is much more certain to ensure that estate taxes are not a problem.
● The GST Tax (Generation Skipping Transfer Tax) stays at the same rates as the estate and gift tax. This tax is imposed upon transfers of wealth over $5.25 million to individuals 37.5 years younger than the individual making the transfers, either through testamentary transfers or lifetime transfers.
● The annual Gift Tax exemption amount increased from $13,000 per person to $14,000.
Most of these changes to the estate, gift, and GST tax laws have been passed as “permanent” changes rather than under the “sunset” provision conditions that we’ve been dealing with for the last 10 or so years. Thus, there is some measure of certainty going forward that this is going to be the law for some time. I hope that is the case. Nevertheless, Congress can change any of the laws just as soon as they decide it is prudent to do so. So, any real permanence in these laws may in fact be illusory. For the moment, however, I will operate under the assumption that these laws will remain permanent.