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Wealth Transfer Taxes After 2012: Good News
by Barry Levin
Although the American Taxpayer Relief Act of 2012 will have
the impact of raising Federal income tax rates on some Americans, it does
contain some good news with respect to "transfer taxes," i.e. Federal estate,
gift and generation skipping taxes.
THE WAY IT USED TO WORK
Let's review what was. In 2012 the "exemption" from the
Federal transfer taxes was $5,120,000 per taxpayer and the maximum tax rate was
35%. This meant, for instance, that a husband and wife who had not previously
made taxable gifts could gift assets worth $10,240,000 to a generation, skipping
tax exempt trust for the benefit of their children and more remote descendants
without paying a gift tax. Furthermore, those assets and the growth
thereof were sheltered from future estate taxes in the estates of their
children and more remote descendants. BUT, those exemptions were scheduled to
revert in 2013 to $1,000,000 per taxpayer and the rate scheduled to rise to
55%.
While many practitioners felt Congress would not let the
exemptions and rates revert, no one was sure what the political process would
bring. As a result, prudent advisors were urging their clients who could afford
it and were so inclined to make substantial gifts to take advantage of these high
exemptions, since the exemptions could potentially "go away."
If you did this, good for you. If you didn't, we are all
relieved that in their "wisdom" Congress and the President made much of the
2012 law permanent. So, let's see where we stand in 2013 and going forward with
respect to federal transfer taxes.
CHANGES FOR 2013 AND BEYOND
- The
exemptions for estate, gift and generation skipping transfer taxes for
2013 (as adjusted for inflation) will be $5,250,000 per taxpayer.
- Estate
and gift taxes are "unified", meaning that one can gift during a lifetime
the same amount as one could die with in one's taxable estate. Previously
the gift exemption was lower than the estate tax exemption.
- The
maximum gift or estate tax rate is 40%.
- The
Generation Skipping Tax exemption and maximum rate is the same as the ones
for estate and gift taxes.
- The
Gift Tax Annual Exclusion for qualifying gifts in 2013 is $14,000 (as
adjusted for inflation).
- The
concept of "portability" of unused estate
tax exemption from a deceased spouse to the surviving spouse is a
permanent part of the law. This means, for example, that if a husband who
has a remaining exemption of $5,000,000 dies and leaves all his assets to
his spouse (instead of, as was previously the case, putting his remaining
exemption in a separate trust that would "capture" that exemption and not
allow it to go unused), the spouse would be able to use both the deceased
husband's and her own exemptions in her estate. Note that this
"portability" feature does not
apply to the GST exemption; so one who desires to fully use his/her GST
exemption will still need to careful planning to create the appropriate
structures for its use.
So here is the "take away." If you
acted in 2012, you have a platform for future planning in 2013 and beyond, and
the growth on what you may have given away will no longer be in your estate[s].
If you didn't act in 2013, your window of opportunity is still open. Look out
and consider what you may want to do.
In any event, it would be good to
meet with your advisors to make sure that you are aware of the opportunities
you have and what you may need to do to take advantage of them.
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