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.


So, the question that I have already begun to receive from my estate planning clients who have estates well under the exemption limits is, “Is estate planning still necessary?”  My answer to those of you with that question on your mind is, “Yes.”  There still exist numerous very important reasons for doing solid planning and making sure it stays updated.  For example, the following reasons for doing estate planning exist regardless of the above mentioned tax law changes.  In fact, these are arguably even more important reasons for planning:


     Ensure that your minor children or grandchildren are taken care of if something should happen to you unexpectedly;


     Avoid probate, which can be quite expensive and time-consuming in some states, including Utah; 


     Ensure that your assets are distributed the way you want, when you want, and to whom you want;


     Protect a child’s or grandchild’s inheritance from irresponsible spending, from creditors and predators, or from a divorcing spouse;


     Help to provide for a family member or loved one with special needs without causing them to lose valuable government benefits;


      Ensure that your assets are placed under the control of a trusted individual upon your incapacity or death;


     Provide meaningful gifts to your favorite charity, school, church or other institution;


     Avoid state inheritance/death taxes that have lower exemptions than federal taxes (Utah currently does not have any state inheritance taxes, but if you own property in another state, you may nevertheless be subject to their state inheritance taxes)


     Help protect your own assets from creditors and frivolous lawsuits (particularly important if you are a professional); and


     Protect yourself, your family and your assets in the event of incapacity.


In addition, there are a number of important tax law changes regarding income taxes that need to be considered when designing an estate plan.  Now is not the time to sit back and relax and think that Congress will now finally leave us alone to get on with our lives.  One thing Congress did not do is resolve the problem of the national deficit.  And we, as taxpayers, have a big fat target on our back as Congress looks towards the future. 


The bottom line is this: Ensuring that your estate planning is up to date and in concert with the law and your family circumstances is just as important today as it was last year.  If you haven’t looked at your planning for a while, the New Year season is a great time to resolve to do so.



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