Monday, January 14, 2013

New Tax Laws That Improve Estate Options

By Ronald Lipman | January 11, 2013


The information in this column is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.

Q: Can you provide an update on the estate tax now that the laws have changed? My wife and I have wills with trusts in them to save taxes. Do we need to change anything?

A: The most important change, and the one that received most of the press, was the increase in the estate tax exemption to $5.25 million per person. This increase is not a new exemption, but rather an extension of the exemption that had been set to expire at year-end. In fact, all of the estate tax laws that were in effect in 2012 were essentially unchanged by the New Year's deal in Washington, except that the estate tax rate rose to 40 percent from 35 percent.

The $5.25 million exemption is permanent, and it is indexed for inflation, meaning it will increase each year. In addition, the lifetime exemption for both the gift and generation skipping transfer tax also increased to $5.25 million per person. Transfers that exceed this limit will be taxed at the same 40 percent rate that applies to the estate tax. This exemption also is indexed for inflation.

The tax act further made portability a permanent part of the estate tax system. Portability is a way for married taxpayers to save taxes. Until 2010, if a person with a taxable estate died without proper estate planning, and left the estate outright to a surviving spouse, the survivor typically lost the ability to shelter property from estate taxes upon his or her death.

The inheritance would not have generated any estate taxes because an unlimited marital deduction exempts all property left to a surviving spouse.

Absent a bypass trust that likely would have been part of better estate planning, however, the surviving spouse would have all the property but only his or her own exemption. This would increase the estate tax exposure of that person's heirs.

Now when a spouse leaves property directly to a surviving spouse, the unused portion of the deceased spouse's $5.25 million exemption can be added to the survivor's exemption, thereby potentially doubling the amount that can be given away during lifetime or left tax-free at death.

Even with portability, creating a bypass trust is still a better option for many married couples because a trust is protected from creditors and can appreciate in value over time, whereas the unused exemption is a fixed amount.

For 2013, the gift tax annual exclusion, which is the amount that can be given away each year without using up any part of the lifetime exemption, is $14,000, up from $13,000 last year. The annual exclusion is indexed for inflation.

Such large exemptions make more planning options available to people who want to make gifts while they are alive, whether in trust or outright. You should meet with your estate planning attorney to see if the new laws would require a change to your current plan.

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  1. The raised question in the article points and concerns all the citizen of the state. And I'm glad that it was answered very well and greatly explained. For those citizens like me that do not know about the new tax laws that improve estate options. Moreover, if you are one of those people who are needing some help on their tax problems, you can contact the tax help Fullerton to ask for assistance and aid.

    1. Thanks for stopping by and dropping a comment, Billy!