In recent columns, we talked about some of the highlights of the recently enacted 2012 American Taxpayer Relief Act. In addition to “permanently” extending the Bush-era tax cuts for most taxpayers, revising tax rates on ordinary and capital gain income for high-income individuals, temporarily extending a host of important tax breaks for individuals, providing permanent relief from the Alternative Minimum Tax and imposing limits on the deductions and exemptions of high-income individuals, the Act permanently extended and modified some of the estate and gift tax provisions of the 2010 Tax Relief Act.
The new law prevents steep increases in estate, gift and generation-skipping transfer (“GST”) taxes that were slated to occur if you died or made gifts after 2012. Prior to the new Act, the lifetime exemption amount was to revert to $1 million, with a top tax rate of 55% in 2013 and thereafter.
Now, the estate, gift and GST tax lifetime exemption amount is “permanently” unified and set at $5 million, indexed to inflation after 2011. The exemption amount was $5.12 million in 2012.
When you make a gift or die after 2012, you can now transfer up to $5.25 million to your loved ones without incurring any estate, gift or GST tax. If you are married, you and your spouse each have an exemption amount, which means the two of you can transfer up to $10.5 million to your loved ones and escape the estate, gift and GST tax.
The increase in the gift tax exemption amount provides you an outstanding opportunity to pass current wealth and future appreciation to lower generations, either by outright gifting or through leveraging strategies, such as family limited liability companies, family limited partnerships and sales to intentionally defective trusts or grantor retained annuity trusts (“GRATs”).
For example, say you gifted $5.25 million to your loved ones this year, there would be no gift taxes due, but you will have used up your lifetime exemption amount. If you lived another 20 years and the gifted amounts doubled in value every 10 years, the gift will have grown in value to $21 million. The entire $21 million passes to your loved ones without incurring any estate, gift or GST taxes. If you would have held on to this property until you died and even if you have left no other property, it would have generated an estate tax liability of $6.3 million.
Although not part of the 2012 Act, the annual inflation adjustments did increase the annual gift and GST tax exclusion amount from $13,000 in 2012 to $14,000 in 2013. You can gift up to $14,000 per person per year without having to file a gift tax return and without eating into your $5.25 million lifetime exemption amount. If you are married, with gift-splitting or separate gifts, you and your spouse can gift up to $28,000 per person per year without having to file a gift tax return and without eating into either of your $5.25 million lifetime exemption amounts.
The top estate and gift tax rate and the GST tax rate did go up from 35% in 2012 to 40% in 2013 and thereafter and it was made “permanent”. Although this is an increase, it is still quite a bit below the 55% rate to which these taxes were scheduled to go in 2013 and thereafter.
If you are married, the new Act continues the estate tax portability feature that was first introduced with the 2010 Tax Relief Act. If you and your spouse have done incomplete or improper planning, you may still be able to transfer up to $10.5 million upon your deaths without incurring any estate taxes. This provision allows your personal representative (executor) to elect to transfer any unused amount of your lifetime estate tax exemption amount to your surviving spouse for his or her later use.
One downside of this portability feature is that in order to utilize it, you have to die; it only applies to estate taxes. There is no portability feature for gift or GST taxes. Another downside of the portability feature is that it can only be made on a timely filed Form 706, U.S. Estate Tax Return, creating unnecessary tax preparation expenses. With proper planning, you and your spouse could utilize both of your lifetime $5.25 exemptions, without the need to use the portability feature or file a U.S. Estate Tax Return.
This is just an overview of the major estate, gift and GST tax provisions of the new Act. Please consult with a qualified tax advisor and estate planning professional to determine if you may be able to use these or any other tax benefits.
By: Matthew M. Wallace, CPA, JD
Published edited February 3, 2013 in The Times Herald newspaper, Port Huron, Michigan as: New estate and gift tax provisions are TAXPAYER FRIENDLY