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Changes that will affect estate planning

Published: Wednesday, June 5, 2013 5:30 a.m. CDT

The American Taxpayer Relief Act of 2012 was enacted on Jan. 2, 2013. The act makes significant changes that will affect many estate plans. Let me summarize the main estate, gift, generation-skipping transfer (GST), and charitable contribution tax laws included in the act and identify opportunities you might consider.

• Estate tax exclusion. The act permanently maintains the $5 million estate tax exclusion amount. This amount is adjusted for inflation each year, beginning with 2012. For 2013, the inflation-adjusted estate tax exclusion amount is $5.25 million. This means that a person dying in 2013 can transfer up to $5.25 million ($10.5 million for a married couple) (reduced by lifetime taxable gifts) at death without paying estate tax.

• Basis adjustment for property acquired from a decedent. The act did not change the law regarding basis adjustment for property acquired from a decedent. Specifically, the basis of property acquired from a person as a result of his death is generally stepped up (or down) to its fair market value on the date of death, thus eliminating all pre-death capital gain or loss on the property. In the case of marital property, both the deceased spouse’s interest in the property and the surviving spouse’s interest in the property qualify for this adjustment.

• Gift tax exclusion. The act makes permanent the unification of the gift and estate tax exclusion amounts. This means that in 2013 each person can make lifetime gifts up to $5.25 million without paying gift tax. However, all gifts that use a portion of this gift tax exclusion will reduce the donor’s estate tax exclusion available at death. For example, if a parent makes a $2 million lifetime taxable gift to a child, the parent’s remaining estate tax exclusion amount is reduced by $2 million at death.

The lifetime gift tax exclusion only applies to gifts in excess of the annual gift exclusion (i.e., the annual amount a person may gift to any person tax-free). For 2013, the annual gift exclusion is $14,000 per person (or $28,000 per married couple).

• GST tax exclusion. The act makes permanent the unification of the estate tax and generation-skipping transfer tax exclusion amounts. This means that in 2013 each person can make transfers to grandchildren (or multi-generational trusts) of up to $5.25 million without paying a GST tax.

• Maximum estate, gift and GST tax rates. The act permanently caps the maximum estate, gift, and GST tax rates at 40 percent. This is a 5 percent increase from the maximum rate in 2012, but 15 percent less than what the maximum rate would have been if the Act had not been enacted.

• Estate and gift tax exclusion portability. The act makes permanent the concept of estate and gift tax exclusion portability. Portability means that spouses, under certain circumstances, can share their unused $5.25 million estate and gift tax exclusion with each other. This portability allows spouses to effectively use a combined $10.5 million exclusion. Portability allows a surviving spouse to elect to use any exclusion unused by his/her last deceased spouse in addition to his/her own $5.25 million exclusion.

For example, if a husband dies in 2013, having made $2 million in lifetime taxable gifts and leaving his entire $8 million estate to his wife, no estate tax is due at husband’s death. If an election is made on the husband’s estate tax return to allow his wife to use his $3.25 million unused estate tax exclusion, the wife’s available exclusion amount (which can be used for lifetime gifts or for estate taxes) is increased to $8.5 million – her $5.25 million plus her husband’s unused $3.25 million.

It is important to note that portability is only available if an election is made on the deceased spouse’s estate tax return. Also, portability is not available for the GST tax exemption. Further, in the event of a remarriage and subsequent death of the new spouse, the surviving spouse will no longer have access to the unused estate tax exclusion of the first deceased spouse.

• IRA charitable rollover. The act allows taxpayers in 2013 who are age 70½ or older to directly transfer up to $100,000 from their IRAs to charity without incurring taxes. In addition, a distribution from an IRA to a taxpayer in December 2012 can be treated as an IRA charitable rollover in 2012 if the distribution is transferred by the taxpayer in cash to a charity before Feb. 1, 2013. Also, a direct payment from an IRA to a charity completed by Feb. 1, 2013 can be treated as if made on Dec. 31, 2012.

Estate planning opportunities

While the act purports to make permanent changes that will affect many estate plans, taxpayers should not be lulled into complacency. Leaders in both the House and Senate have acknowledged that the act is only the first step toward getting the country’s fiscal house in order. As Congress takes its next steps to address our country’s fiscal challenges, additional legislation designed to raise revenue is anticipated. This legislation may include provisions that severely limit the ability to transfer wealth to children and future generations. Proposals that had been on the table in these discussions and may be renewed again include: a minimum term for grantor retained annuity trusts, term limits for GST trusts, limits on the availability of valuation discounts, and estate taxation of grantor trust assets.

Now is an excellent time to consult legal counsel to take advantage of the opportunities currently available.

Happy Planning!

• Timothy J. Dooley, CFP, is president of Comprehensive Retirement Resources Inc., 201 N. Draper Road, McHenry. Phone 815-578-4217. He specializes in retirement and estate planning, and offers securities through Raymond James Financial Services, Inc.

• Timothy J. Dooley, CFP, is president of Comprehensive Retirement Resources Inc., an independent firm located at 201 N. Draper Road, McHenry. Phone 815-578-4217. Dooley specializes in retirement and estate planning, and offers securities through Raymond James Financial Services Inc, member FINRA/SIPC. 

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