After a lot of debate and some last minute shenanigans, the American Taxpayer Relief Act (or “ATRA” for short) was signed into law by President Obama on January 2, 2013. This new law makes the changes made by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act that was enacted in December 2010 permanent with regard to federal estate taxes, gift taxes and generation skipping transfer taxes, with one notable exception. Below is a brief summary of what this relief plan provides with regard to these types of federal taxes for 2013.
New and more favorable estate tax, gift tax and generation-skipping transfer tax exemptions and less favorable tax rates have gone into effect. Under the provisions of ATRA, the federal estate tax exemption has been indexed for inflation and therefore increased from $5.12 million in 2012 to $5.25 million in 2013, but the estate tax rate for estates valued over this amount has increased from 35% in 2012 to 40% in 2013. In addition, the lifetime gift tax exemption has also been indexed for inflation and therefore increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum gift tax rate has increased from 35% in 2012 to 40% in 2013. Finally, the generation skipping transfer tax exemption has also been indexed for inflation and therefore increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum generation skipping transfer tax rate has increased from 35% in 2012 to 40% in 2013. These unified exemptions will continue to be indexed for inflation in 2014 and later years.
“Portability” of the federal estate-tax, tax exemption between married couples has become permanent. In 2009 and prior years, married couples could pass on up to two times the federal estate tax exemption by including “AB Trusts” in their estate plan. The Tax Relief Act of 2010 eliminated the need for AB Trust planning for federal estate taxes in 2011 and 2012 by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse’s estate tax exemption, which is commonly referred to as “portability of the estate tax exemption.” ATRA makes portability of the estate tax exemption between married couples permanent for 2013 and beyond, which means that in 2013 a married couple can pass on $10.5 million to their heirs free from federal estate taxes with absolutely no planning at all. Note, however, that even if the deceased spouse’s estate will not be taxable (in other words, is valued less than $5.25 million), the surviving spouse will nonetheless be required to file IRS Form 706, United States United States Estate (and Generation-Skipping Transfer) Tax Return, in order to take advantage of the deceased spouse’s unused estate tax exemption, otherwise the deceased spouse’s exemption will be lost.
Special planning will be required for state estate taxes in certain states. To date, none of the states that have enacted a freestanding state estate tax have made the state estate tax exemption portable between married couples. This means that in states where there is a difference between the state estate tax exemption and federal estate tax exemption (such as in Maine, where the 2013 estate tax exemption is only $2 million, which leaves a $3.25 million gap between the state and federal exemptions), married couples will need to include special planning in their estate planning documents in order to take advantage of both spouses’ state estate tax exemptions.
Special planning will be required for generation skipping trusts. While as mentioned above the estate tax exemption has been made portable between married couples, the generation skipping transfer tax exemption has not. This means that in order for married couples to take advantage of both spouses’ generation skipping transfer tax exemptions, special planning will be required in married couples’ estate planning documents.
For more information on the changes to the Gift & Estate Taxes for the 2013 tax season, please contact a tax professional at Beaton Accounting for a FREE consultation at: 631-921-6894.
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