The American Taxpayer Relief Act of 2012, or "ATRA", was signed into law on January 2, 2013. It significantly impacts income taxes, and also provides substantial estate tax relief compared to the changes that otherwise would have gone into effect in 2013. But ATRA isn’t all positive for estate planning: It increases the estate tax rate compared to the previous estate tax law regime.
Here are some of the most important changes to consider:
Exemptions and rates – Estates and Gifts:
Without congressional action, gift, estate and generation-skipping transfer (GST) tax exemptions would have dropped by more than $4 million, and the top rates would have jumped significantly (by 20 percentage points) beginning in 2013. ATRA increases transfer taxes for some families, but much less dramatically: It retains the 2012 $5.12 million exemptions – indexing them for inflation – and increases the top rates by five percentage points to 40%.
The changes are permanent, which, despite the rate increases, will be welcome news to many taxpayers. The exemptions remain at an all-time high level and will keep up with inflation for future years. This means that even if you used up your exemptions in 2012 to lock them in, you’ll still have some more exemption available in future years. In addition, the top rate, though higher than it was in 2012, is still quite low historically.
Legislation in 2010 included a provision that – temporarily – provided significant estate planning flexibility to married couples. If one spouse died in 2011 or 2012 and part (or all) of his or her estate tax exemption was unused at his or her death, the estate could elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption.
This relief was somewhat hollow in most cases, however, because it applied only if the surviving spouse made gifts using the exemption or died by the end of 2012. ATRA has made the portability provision permanent.
ATRA preserves several other provisions that affect estate planning, including:
Many reasons for a plan review
The 2013 estate tax law changes aren’t the only reason to review your estate plan. For example, the state estate tax continues to be a consideration. If you live in a state with an estate tax, the exemption amount could be dramatically different from the federal exemption amount. Improper planning could lead to an unpleasant surprise in the form of significant state estate tax liability. Further complicating matters is that even if your state doesn’t have an estate tax, it’s possible you may be subject to estate tax in other states in which you own property.
Changes in your personal situation may also require a change in your estate plan. Births, deaths, marriages, and divorces can all have an impact. So can changes in your personal finances or your business.
To ensure that you minimize your tax liability and that your assets will be distributed according to your wishes, you need to review your estate plan now. We’d be pleased to help you determine how ATRA and other changes will impact your estate plan and what plan revisions can help you achieve your goals.