David P. Shaffer, Esq.
With most of us feeling uneasy, and perhaps experiencing a fear of heights concerning the uncertainty of the tax laws and the so-called "fiscal cliff," we anxiously awaited the end of 2012. As the holidays passed and the new year approached, Congress quickly huddled and passed the 2012 Taxpayer Relief Act ("the Act" or "the legislation") which the President has signed into law. This legislation addresses numerous tax issues, some of which have been highlighted in the national media. There are several important components of the legislation that directly impact estate planning. This article will briefly detail the key estate planning pieces of the legislation for 2013 and beyond.
First, the legislation keeps the current federal estate, gift and generation-skipping transfer (GST) tax exemption amounts in place. The exemption amount for 2012 was $5,120,000, and since this is indexed for inflation, this number is expected to be $5,250,000 in 2013. This is good news, as without the legislation the federal exemption amounts were scheduled to decrease to $1,000,000 in 2013. For those estates in excess of the exemption amounts, the Act increases the tax rate to 40%. Although this rate is higher than the 2012 rate of 35%, it is much lower than the 55% rate that would have been instituted without the new legislation.
The New York State estate tax exemption amount remains at $1,000,000, unaffected by the federal legislation.
Spousal portability, a key component of the 2011-2012 federal estate tax regime, has also moved from "temporary" status to becoming a permanent part of the federal estate tax landscape in 2013 and beyond. This means that you and your spouse can combine your federal exemption amounts so that if one spouse passes away without using his or her full $5,250,000 exemption, the unused portion can be transferred to the surviving spouse to use on his or her subsequent death, provided certain conditions are met. This is more good news, although it does not impact the New York State estate tax laws which do not provide for spousal portability.
Although not part of the Act, 2013 also ushers in an increase in the annual gift tax exclusion amount from $13,000 to $14,000. This means that you can gift $14,000 ($28,000 for married couples) per year to as many recipients as you like (children, grandchildren, etc.) without using a portion of your lifetime federal estate and gift tax exemption.
The Act also provides an extension of the charitable rollover feature of past laws, allowing tax-free distributions from individual retirement plans for charitable purposes for IRA owners over age 70 1/2. In other words, rather than taking a required minimum distribution from your IRA which you may not need, and thereby experiencing a tax hit on such income, this provision allows you to transfer that distribution directly to charity and realize income tax savings. For those who took distributions in 2012 in an uncertain tax climate, the law allows you to act quickly to transfer the IRA distributions to charity. By doing so on or before January 31, 2013, the Act will treat certain distributions as having been made directly to the charity on December 31, 2012. If you have charitable inclinations, this feature of the law provides an excellent opportunity to achieve income tax savings if immediate action is taken.
The 2012 Taxpayer Relief Act affords greater clarity to estate planning. The previous law only had a "shelf life" of 2 years (2011 and 2012). This legislation makes the federal estate, gift and GST tax regime "permanent," thereby allowing you to structure your estate plan accordingly. If you took action in 2012 by making large gifts before year end, that planning still serves you well, as the appreciation on gifted assets has now been removed from your taxable estate. Without such transfers, the asset at its appreciated value would remain in your estate on your death, potentially taxed at the higher tax rate of 40%.
David P. Shaffer is an associate attorney with the firm’s Wealth Transfer Group and can be reached at 585-987-2878 or email@example.com.