2013 Estate Tax Law Updates

The New Year has arrived with all of its attendant changes.  Although Congress couldn’t seem to get its act together until after the deadline passed, they have ultimately settled on a few things, which is very good news for those of us who are trying to understand what our options are.  Here is a quick summary of some of the highlights of the 2013 American Taxpayer Relief Act that are particularly relevant to our clients:


     The gift and estate tax exemption amounts will be at least $5.12 million per person.  This amount will likely go up this year to $5.25 million due to inflation adjustments.  Thus, an individual may still gift or devise as much as $5.25 million  without incurring any transfer tax liability.

     The estate tax rate changed from 35% in 2012 to 40% in 2013 for those who die having more than the $5.25 million in their estates.  This means that if your estate is larger than this, additional planning strategies will need to be implemented to avoid paying the IRS $0.40 on the dollar for every dollar over this amount when you die.

     “Portability” will remain between spouses on the use of their estate tax exemption.  This means that a surviving spouse can use the other spouse’s unused estate tax exemption if the $5.25 million is not sufficient at the second spouse’s death.  However, portability is not automatic as the surviving spouse must make this election on a Form 706 after the first spouse’s death.  Such a filing must be made shortly after the first death or this benefit may be lost.  Although this benefit is certainly a good thing, it can lull people into a false sense of security regarding their estate tax liability and prevent them from doing the kind of planning that is much more certain to ensure that estate taxes are not a problem.

     The GST Tax (Generation Skipping Transfer Tax) stays at the same rates as the estate and gift tax.  This tax is imposed upon transfers of wealth over $5.25 million to individuals 37.5 years younger than the individual making the transfers, either through testamentary transfers or lifetime transfers.

     The annual Gift Tax exemption amount increased from $13,000 per person to $14,000.


Most of these changes to the estate, gift, and GST tax laws have been passed as “permanent” changes rather than under the “sunset” provision conditions that we’ve been dealing with for the last 10 or so years.  Thus, there is some measure of certainty going forward that this is going to be the law for some time.  I hope that is the case.  Nevertheless, Congress can change any of the laws just as soon as they decide it is prudent to do so.  So, any real permanence in these laws may in fact be illusory.  For the moment, however, I will operate under the assumption that these laws will remain permanent.

Don't Like Paying Taxes? Geithner Says Too Bad.

It has been a busy year for us here at Platt Law, and we haven't been as regular with our e-newsletter as we have in the past. For that, I apologize.

There has been a great deal of uncertainty and debate in the wealth management and planning world regarding the future of the tax laws and how they will affect the average American as we try to build wealth for our families and provide for them in the future.

A question I get almost daily from my clients centers on the future of the wealth transfer taxes in this country. If you recall, the current tax laws will lower the estate and gift tax exemption to $1 million per person on January 1, 2013 (less than six months from today). What this means to you is that if your estate (which includes the death benefit value of any life insurance policies you own) is over $1 million, your family could pay up to 55% of each dollar over that amount to the IRS.

There Is No Good Reason to Make These Mistakes

Today I read an excellent article warning CPAs (Certified Public Accountants) of the risks that many of their clients face with regard to estate planning. Even when some form of estate planning has been done, the following mistakes show up repeatedly in clients' estate plans:

(1) "Outdated or Unsigned Estate Planning Documents" (i.e., if they have a plan at all, most clients' plans are either outdated or inadequate, and worse yet, unexecuted)

(2) "Lack of Coordination between the Estate Planning Documents, Titling of Assets and Apportionment of Estate Taxes" (i.e. the house is still in dad's name rather than in the name of the trust resulting in an unnecessary probate proceeding)

(3) "Lack of Understanding That a Transfer of $1 Is a Gift" (i.e., that transfers (typically of real property) for less than the fair market value of the property constitute a gift)

(4) "Life Is a Movie, Not a Snapshot" (i.e., that estate planning should be viewed as a process rather than a one-time transaction)

This One Simple Tip Can Save You Thousands

Last week I had a client contact us in a panic because her daughters had told her "Mom, if you die, the government is going to tax you 50% of everything that is in your bank account!" They further explained that she should probably start giving away her money to children and grandchildren now while she was still alive in order to avoid this tax.

Now I know this family well enough to feel comfortable that these daughters were not trying to exploit their aged mother. However, this experience highlighted to me a problem that I see very often in my practice. The federal and state laws that govern taxation are extremely complex and are in a constant state of evolution. Just when we start to get a handle on how our families or our businesses are going to be taxed, we find out that the rules have changed.

What Does the Proposed Estate Tax Bill Mean for You?

 You've probably heard about the bill being hotly debated in Congress right now that would reinstate the federal estate tax (from it's current status of repeal) at a 35% rate on estates larger than $5 million ($10 million for married couples). Current reports are indicating that this bill will most likely pass. (Get more information about the bill here.)

What does this mean for you?

If the bill passes, and you and your spouse have an estate (real property, bank accounts, retirement accounts, life insurance, business interests, stocks, bonds, cars, boats, ATVs, etc.) that is less than $10 million, you will likely pay no estate tax if you die in 2011 and beyond (unless Congress decides to change things again). For married couples with estates larger than $10 million, you will be taxed at a 35% rate on everything over that number at the death of the second of you to die. This is good news for many of you.

If this bill does not pass, and you and your spouse have an estate larger than $1 million, you will be taxed at a 55% rate on everything over $1 million. Once you factor in the proceeds of life insurance and retirement accounts, most of you will probably find that your family will be facing a federal estate tax bill upon your death.

What is going to happen in the end? Your guess is as good as mine. If the bill passes, there are a number of my clients who will be very relieved as a result of the estate tax break that it represents.

NY Times: Don't Let the Tax Tail Wag the Estate Planning Dog

A recent New York Times article discussing the uncertainty of the Estate Tax environment provides some important reminders about opportunities that currently exist for saving on taxes.  Perhaps more importantly, however, the last few paragraphs of the article reminds us that sometimes, in an effort to "stick it to the IRS," we can sometimes get carried away and allow the tax tail to wag the estate planning dog.

Mid-year Update on Current Estate Tax MESS

As you may have heard, the federal estate tax rules changed radically in 2010 and could change radically again in 2011 unless Congress passes new legislation. This article is intended to advise you of what has happened and encourage you to reevaluate your estate plan as soon as possible.

2001 Tax Act. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates. EGTRRA provisions included:

• In 2009, the estate and GST exemptions increased to $3.5 million per decedent, with a flat 45% estate and GST tax rate on any excess. The gift tax exemption was $1.0 million, with tax rates from 41% to 45%.

• In 2010, the federal estate and GST taxes were repealed for one year. The gift tax $1.0 million exemption remained, with a lower flat tax rate of 35%. Thus, you had to die or pay gift tax to get the benefit of the change. The step up in basis rules (which gave a “fresh-start” fair market basis for most assets of a decedent) was replaced with an adjusted carry-over basis. These new basis rules permit a step up in basis of up to $1.3 million, plus an additional $3.0 million for certain spousal transfers at death.

• On January 1, 2011, EGTRRA will be automatically repealed, resulting in an odd situation:

Estate Taxes Will Continue To Be An Issue

A recent article in the Wall Street Journal provided an in depth look at the history of the development of the estate tax in the U.S. as it currently stands.  Although the Republican and Democrat supporters of the repeal of the federal estate tax had managed to pass a law phasing out and ultimately repealing the estate tax, their efforts seem to nevertheless be on the rocks today with the incoming Obama administration and decidedly fiscally liberal majority in congress. 

New $13,000 Annual Gift Tax Exclusion

The IRS recently announced that the annual gift tax exclusion amount will increase from $12,000 to $13,000 beginning Jan. 1, 2009.  This means that every individual can give away up to $13,000 per person, per year without having to file a gift tax return. For example, you could make a gift of $13,000 to each of your three children and to each of their spouses for a total of $78,000 per year (or two times that amount for married couples).  There is no limit to how many individuals you may make gifts to.

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