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January 11th, 2013
Frankfurt Kurnit Estate Planning Alert
As a result of the American Taxpayer Relief Act of 2012 signed by President Obama on January 2, 2013, the New Year has brought with it several permanent changes to the Federal estate, gift and generation-skipping transfer (GST) tax laws that are unexpectedly more favorable than those predicted in the closing months of 2012.
The most significant changes are summarized below.
Tax Rates: The top rate for the Federal estate, gift and GST tax is increased from 35% to 40%.
Exemption Amounts: The exemption amount for estate, gift or GST transfers made in 2013, as indexed for inflation, is $5.25 Million (projected). The $5.25 Million exemption amounts will be adjusted for inflation annually.
Federal Planning Points:
- Individuals who took advantage of the full exemption amount in 2012 by making lifetime gifts of $5.12 Million (or married couples who made gifts of $10.24 Million) can now make additional tax-free gifts of $130,000 (or $260,000 for married couples).
- The gift tax annual exclusion for gifts made in 2013, as adjusted for inflation, is increased to $14,000 (from $13,000) per donee. These annual exclusion gifts do not reduce the $5.25 Million gift tax exemption amount.
- The anticipated expiration of historically generous tax rates and exemptions may have motivated much of the gift planning in 2012. These gifts remain tax advantageous for the donor, since all of the appreciation on the property gifted will be removed from the donor''s tax base.
State Planning Points:
- State estate taxes remain unchanged.
- For residents of New York State (NYS) (or other "decoupled" estate tax states), lifetime gifts could be particularly advantageous since (i) there is no separate NYS gift tax and (ii) the NYS estate tax exemption amount remains at $1 Million. A New York resident may transfer $5.25 Million during lifetime without incurring any gift taxes, whereas the same transfer (to a non-spouse) occurring at death would be subject to more than $400,000 of NYS estate tax.
- Similarly, for married couples, more than $400,000 of NYS estate tax is triggered upon the death of the first spouse, if such spouse''s Will includes a formula "credit shelter" or "bypass" bequest based on the Federal (rather than NYS) estate tax exemption. In some cases, it may be advantageous to defer the payment of NYS estate tax until the death of the surviving spouse.
Portability: The portability provisions, which were added in 2011 and set to expire on December 31, 2012, have now been made permanent. These provisions allow the unused estate tax exemption of a deceased spouse to be allocated to a surviving spouse and claimed for estate (but not GST) tax purposes.
Changes to the Federal Income Tax
The new law also contains a number of changes to the Federal income tax, many of which are applicable only at certain income thresholds. Here are just a few:
For individuals with taxable income over $400,000 and for married couples with taxable income over $450,000:
- The top tax rate for ordinary income and short-term capital gains is increased to 39.6% (from 35%).
- The top tax rate for long-term capital gains is increased to 20% (from 15%).
- A "Medicare surtax" of 3.8% that was enacted in 2010 becomes effective in 2013. This additional tax is imposed on unearned net investment income of individuals, estates and trusts (excluding grantor trusts and tax-exempt trusts). It applies to individuals with modified adjusted gross income (MAGI) in excess of $200,000, married couples with MAGI in excess of $250,000, and trusts or estates with adjusted gross income in excess of $11,950.
- Personal exemptions and certain itemized deductions (including state taxes, mortgage interest and charitable contributions) are incrementally reduced for individuals with adjusted gross income in excess of $250,000 and married couples with adjusted gross income in excess of $300,000.
From a planning perspective, the new law provides a much needed degree of certainty and stability, leaving in place the $5 Million-plus exemption amounts, and leaving untouched (at least for now) many available strategies and techniques, including, for example, the use of grantor retained annuity trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs), that can be used to leverage the benefit of the increased exemption amounts.
We would be happy to discuss the new tax law with you in further detail and evaluate whether any new or additional planning might be suitable for you.
For further information on the American Taxpayer Relief Act of 2012, please contact:
Barbara E. Shiers at (212) 826 5526 or email@example.com
Linda J. Wank at (212) 826 5546 or firstname.lastname@example.org
Mark D. Lehrman at (212) 826 5527 or email@example.com
Bernard C. Topper at (212) 826 5547 or firstname.lastname@example.org
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