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Estate and Gift Tax Changes Made "Permanent"




by:
Jeffrey P. Consolo
Katherine E Wensink
McDonald Hopkins LLC - Cleveland Office

 
January 16, 2013

Previously published on January 2013

On New Year’s Day, Congress and President Obama reached a deal in the American Taxpayer Relief Act of 2012 (2012 Tax Act). The 2012 Tax Act provides the first “permanent” estate, gift, and generation skipping transfer (GST) tax provisions since 2001.

The 2012 Tax Act mimics the rules for tax years 2011 and 2012 with the exception of increasing the top estate tax rate to 40 percent. While the 2012 Tax Act is “permanent,” this only means it will not expire. Congress may amend it or certain provisions at any time.

Highlights of the 2012 Tax Act include the following:

  1. Each person may give either during life or at death an amount equal to $5 million. This is the “basic exclusion amount” and is indexed for inflation. Therefore, in 2013 the basic exclusion amount is actually $5.25 million.
  2. The top tax rate for transfers by an individual during life and at death exceeding the basic exclusion amount is 40 percent. During 2011 and 2012, this rate was 35 percent.
  3. If a married person does not fully utilize his or her basic exclusion amount, then the unused amount may be used upon the death of the surviving spouse. In order to use the unused unified exemption amount, an estate tax return is required upon the death of the first spouse to preserve the exemption. This does not pertain to the generation skipping tax exemption, which is not “portable.”
  4. The annual exclusion amount has been raised to $14,000, up from $13,000 in 2012. This is the amount an individual can give to any other individual in any given year, without reducing the individual’s basic exclusion amount. This change was scheduled to occur even without the 2012 Tax Act.

For those individuals who used 2011 and 2012 as a time to reduce their taxable estates, there are still advantages to having made those gifts, even though the reduction in the basic exclusion amount that may have prompted those gifts did not occur. For example, by making a gift prior to year end 2012, both the asset and any post gift appreciation is passed to the next generation.

Now that the estate, gift, and GST tax has been made “permanent,” it is a good time to review your estate plan and determine what, if any, changes need to be made. The fear of the unknown that may have prevented planning in the past has been lifted.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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