On January 1, 2013, Congress passed new law known as the American Taxpayer Relief Act of 2012, or “ATRA.” ATRA makes many important changes to the Internal Revenue Code. The following are some notable highlights:
Estate, Gift & Generation-Skipping Tax Transfers
The exemptions for federal estate, gift and generation-skipping tax (“GST”) transfers are set at $5,000,000, indexed for inflation. For 2013, the exemption is $5,250,000 (or $10,500,000 per couple), reduced by any portion of the exemption used in prior years. Taxable transfers beyond the available exemption will be subject to a 40% tax rate. This law sets so-called permanent exemptions because, unlike the prior law, the exemptions and rates do not automatically adjust or sunset. However permanent, the law is still subject to future legislation.
New York still does not have a gift tax, which means lifetime gifts continue to be particularly advantageous for New York residents.
ATRA makes portability permanent. Portability allows a surviving spouse to inherit the unused federal (not state) exemption amount of the deceased spouse, if the executor files an estate tax return for the deceased spouse and makes an affirmative election. The unused GST exemption of a predeceased spouse is still not portable to the surviving spouse.
ATRA increased the top Federal income tax bracket from 35% to 39.6%, effective for this year. In addition, there is a new 3.8% Medicare Tax that applies to most dividends, interest, rents, royalties, certain annuities and capital gain. Although the 39.6% and 3.8% tax rates apply only to individuals with relatively high levels of income, these rates of tax apply to trusts with about $12,000 of income. One immediate reaction is that the use of trusts should be curtailed. However, I believe a flexible trust will continue, in most cases, to be beneficial for asset protection and generational wealth preservation.
ATRA does not change the annual exclusion from the federal gift tax. The annual exclusion was already indexed for inflation, and, for 2013, the exclusion has increased from $13,000 to $14,000 per donee (or $28,000 per donee for a couple).
Not Included in ATRA
It is important to note that ATRA did not include many proposals to limit certain estate planning techniques that, if enacted, would have dramatically effected estate planning. These include the restriction the of the term for Grantor Retained Annuity Trusts, disallowing minority discounts for many family owned entities, consistent valuation requirements for estate tax and basis for capital gains, limiting the duration of generation-skipping trusts, and providing consistent treatment of grantor trusts with respect to income, estate and gift tax. These techniques are still effective, however, subject to future legislation.