How Does the American Taxpayer Relief Act of 2012 Affect Estate Planning?

At the start of the year, the U.S. didn’t veer over the so-called “fiscal cliff” when Congress passed the American Taxpayer Relief Act of 2012 (ATRA),  ATRA, which was signed into law by President Obama on January 2, 2013, extended the Bush tax cuts that were established in the 2001 Economic Growth and Tax Relief Act, and this is overall good news for your estate planning, as Federal gift, estate, and generation-skipping transfer tax provisions were made “permanent” with ATRA.

Despite the potential threat to lower estate tax exemption to $1 million per person, under ATRA, Federal gift and estate tax exemption amounts will remain at $5 million per person—and $10 million for family estates, which are indexed annually to adjust for inflation.  This exemption is portable between spouses. Portability is a very important issue for widows and widowers, as these surviving spouses are able to transfer the unused portion of their spouse’s exemption—giving them a total of $10 million that is tax exempt, which is also indexed for inflation.  Portability is clearly an important benefit, and to receive this benefit the surviving spouse must properly file a Federal estate tax return.  The gift and estate tax exemption amounts can also be combined into a strategy of lifetime and testamentary (i.e., upon death) transfers to family members and other non-spouse, non-charitable beneficiaries, to minimize the overall impact of gift and estate taxes on a combined spousal estate.  In summary, fewer Americans will face a true gift or estate tax liability, given Congress’ adoption of permanent larger effective exemption amounts (as adjusted for inflation in 2013, $5.25 million per individual;  $10.5 million per married couple).

Another piece of good news about the passing of ATRA which benefits estate planning is that the tax rate on estates larger than the adjusted $5.25 million exempt amount increased from 35% to 40%, which is much better than the proposed 55% estate tax rate that otherwise would have been in effect without ATRA’s passage.

Under ATRA, the generation-skipping transfer (GST) tax exemption will remain at $5 million, which is also indexed annually to adjust for inflation ($5.25 million in 2013).  However, GST is not portable between spouses, and this lack of portability is something you should discuss with your Estate and Elder Law Attorney, as advance planning through use of a trust is one way you could address this issue which would otherwise impact your grandchildren or other descendants.

In addition to the foregoing, the annual gift tax exclusion amount is currently $14,000 per donee, up from $13,000 in 2012.  Split gifts by spouses are still permitted, increasing the annual exclusion gift to a single donee from a married couple $28,000 in 2013.  Annual gifting strategies continue to be in vogue for almost everyone who is seriously concerned with reducing their estate for gift and estate tax purposes.

The passing of ATRA was certainly good news for your estate planning options, as it gives you more ways to protect your assets.  In addition, the number of Americans who will have to actively plan to avoid or eliminate federal estate and gift taxes has been reduced from what would have otherwise existed if ATRA had not been passed.  To ensure that you and your family receive maximum benefit from ATRA, it is important for you to consider all of your options and decide if implementing a will or trust estate planning strategy, or employing a lifetime giving strategy, will meet your and your family’s needs best.

Don’t be a victim of one size fits all planning. Know your legal rights about how the American Taxpayer Relief Act of 2012 affects you by consulting an Elder Law/Estate Planning attorney and act accordingly!