|December 13, 2013|
Previously published on December 11, 2013
The American Taxpayer Relief Act of 2012 made the following federal estate tax provisions permanent as of January 1, 2013:
- The basic applicable exclusion amount (i.e., the “tax-free amount”) is now $ 5 million plus adjustments for inflation. This means that each taxpayer may transfer up to $5 million (plus the inflation adjustment) of value tax-free during his or her lifetime or at death. Married couples may transfer up to $10 million (plus the inflation adjustment) of value during their joint lifetimes. The inflation adjustment is $250,000 in 2013 and will be $340,000 in 2014.
- A spouse’s unused applicable exclusion amount may be able to be used by a surviving spouse under some circumstances. This provision is referred to as “portability” and may help married couples who have not planned efficiently still avoid federal estate taxes. A federal estate tax return must be filed upon the death of the first spouse if portability is intended to be used by the surviving spouse.
- The maximum federal estate tax rate will be 40 percent. This rate also applies to the federal gift tax and generation-skipping transfer tax.
- State death taxes will continue to be allowed as deductions rather than as credits. Therefore, state estate tax laws based on the federal state death tax credit formula will not be effective. For example, the estate tax law in Florida will not apply until the Florida statute is changed by its legislature.
- The general rules for valuations did not change. Therefore, grantor retained annuity trusts and family limited partnerships remain viable opportunities.
Because we now seem to have a stable planning environment, all taxpayers should consider taking the following actions:
- If you are married, the marital trust allocation formula in your will or trust declaration should be reviewed as soon as possible. It is quite possible that it will not work the way that it was intended. Because the federal tax laws now seem permanent, amending your trust may be a good idea.
- If you are married, you should review the balance of assets between spouses so that both spouses can use their full tax-free amounts. Portability does not apply to the Federal generation-skipping tax or many state estate taxes.
- If you have not yet planned for your business transition, you should do so now. It takes a long time to plan for a successful business transition. The tax law change allows us to plan efficiently for the needed ownership transfers.