The recent tax legislation dealing with the "fiscal cliff" included significant revisions to the estate tax law that will affect estate planning for the foreseeable future. These revisions include:
- The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news because, for more than ten years, we have been planning with uncertainty under legislation that contained expiration dates. And while "permanent" in Washington only means that this is the law until Congress decides to change it, at least we now have some certainty with which to plan.
- The federal gift and estate tax exemption will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains, so those who did not take advantage of this in 2011 or 2012 can still do so. Also, with the amount tied to inflation, more assets can be transferred each year.
- The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that "skip" a generation. Having this exemption now be "permanent" allows for planning that will greatly benefit future generations.
- Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
- The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
- The "portability" provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up trust planning specifically for this purpose. However, there are still many benefits to using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
- Separate from the new tax law, the amount for annual tax-free gifts has increased to $14,000.
Therefore, for most Americans the 2012 Tax Act has removed the emphasis on estate tax planning and put it back on the real reasons to do estate planning: taking care of ourselves and our families the way we want. Those who might be tempted to skip estate planning because their estates are less than the $5 million range should remember that proper estate planning provides peace of mind by allowing Americans to:
- Avoid state inheritance/death taxes that have lower exemptions than federal taxes;
- Avoid probate, which can be quite expensive and time-consuming in some states;
- Ensure their assets are distributed the way they want;
- Protect an inheritance from irresponsible spending, a child's creditors, and from being part of a child's divorce proceedings;
- Provide for a loved one with special needs without losing valuable government benefits;
- See that control of their assets remains in the hands of a trusted person;
- Provide for minor children or grandchildren;
- Help protect assets from creditors and frivolous lawsuits (especially important for professionals);
- Protect themselves, their family and their assets in the event of incapacity; and
- Help create meaningful charitable gifts.
For those with larger estates, ample opportunities remain to transfer large amounts tax-free to future generations. But with the increase in estate and income tax rates, it is critical that professional planning begins as soon as possible. Also, with Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated. Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.
For those who have been sitting on the sidelines, waiting to see what Congress would do, the wait is over. Now that we have some certainty with "permanent" laws, there is no excuse to postpone planning any longer.