Summary of New Estate, Gift and Generation Skipping Transfer Tax Law
The America Taxpayer Relief Act of 2012 (ATRA) is now law. Technically, it was passed by Congress on January 1, 2013 and signed by the President on January 2, 2013. For the first time since the Bush Tax Cuts were passed in 2001, most of the tax cuts are permanent.
We do not have to worry about whether Congress will actually do something; they finally did. Since there were sufficient votes, it will not expire in 10 years. It now requires Republicans, Democrats, the President and both houses of Congress to make further changes.
I will leave it up to the CPAs to explain the income tax aspects of the law. The estate tax aspects are relatively simple.
There is a combined exemption of $5,000,000 per person from estate and gift taxes. The exemption is indexed for inflation, which makes it $5,250,000 for 2013. For a married couple, the exemption is up to $10,500,000, again subject to future inflation adjustments. The tax above the exemption amount is now 40%.
ATRA also contains portability. Portability means that a surviving spouse can use the unused exemption of his or her most recently predeceased spouse. However, the amount of the predeceased spouse’s exemption is locked in as of the date of his or her death.
In the past, we were not sure if it was going to be the amount at the date of death of the first spouse or the amount at the date of death of the second spouse. This caused significant uncertainty in planning. Now we at least have some certainty.
In order for portability to apply, although no tax or estate tax return may otherwise be due, a timely estate tax return must be filed for the estate of the predeceased spouse. Timely is 9 months after the date of death of the first spouse which can be extended for 6 additional months. Although a complete return is also due, the IRS announced that it will loosen the requirements, somewhat, in order to make it easier to file the return.
One irony is that the IRS is not requiring the valuation of certain items that qualify for the estate tax marital deduction. The reason for the irony is that many of the items need to be valued in any event to calculate later capital gains and losses.
The estate tax return filed in this abbreviated manner is also subject to further review upon the death of the surviving spouse for purposes of determining if the portability amount is correct. Otherwise, the return would have been subject to the normal statute of limitations.
What portability means is that if a spouse dies in 2011 or later and leaves all of his or her assets to their surviving spouse, then the surviving spouse may use the predeceased spouse’s exemption. If the decedent leaves assets to some other beneficiary who is not a spouse or qualified charity, such as a child, the gift reduces the portable amount by the value of the gift or bequest.
Athough the surviving spouse’s exemption will be subject to further inflation adjustment, the predeceased spouse’s exemption will not be adjusted after his or her death. So, for instance, if a spouse dies in 2013, then his or her exemption will be locked in at $5,250,000.
The gift tax exemption is the same as the estate tax exemption. The lifetime exemption is one unified exemption that can be used to reduce either estate or gift taxes. Portability on the estate tax side may also allow larger gifts by the surviving spouse.
With both estate and gift taxes, the issues become much more complex if there is a subsequent marriage after the death of the first spouse. The exemption of the first spouse to die can be lost upon remarriage. This is because you can only use the exemption of the most recently deceased spouse and the new spouse may not have his or her own full $5,250,000 exemption, if they made substantial previous gifts. If the new spouse predeceases, then the exemption of the first predeceased spouse will be lost because the new spouse becomes the most recently deceased spouse.
The exemption amount of an individual will become a significant issue in negotiating premarital agreements between couples and may cause some to think twice before getting married, especially if one of them has used up his or her exemption. This may also cause “shopping” for spouses in order to use their exemptions.
Keep in mind that a mere $5,000,000 exemption at a 40% estate tax rate can be worth as much as $2,000,000 in tax savings. Oddly, this can make someone with modest means, who is substantially older and in very poor health, an attractive candidate for marriage.
The generation skipping transfer tax exemption amount is the same as for estate taxes with important differences. It is not shared with the gift and estate tax exemption and there is no portability. For this reason, even more caution needs to be observed with respect to how it is used.
The annual gift tax exclusion is now $14,000 per donee, also subject to future inflation adjustments. Proper gifts within the limits do not require filing a gift tax return and there is no loss of the lifetime exemption. Annual gifts in excess of $14,000 per donee will require filing a gift tax return and also use of the lifetime exemption for the amounts over $14,000, per donee. A gift tax return is also required when one spouse makes his or her own gift and also makes the gift for the other spouse, even if the gift is no more than $14,000, per donee.
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