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Estate planning tax update after enactment of ATRA
By now you should have all heard that Congress narrowly averted the country's fall over the "fiscal cliff" at the very last moment (well, actually, after the very last moment, but retroactive to the very last moment) by enacting the American Taxpayer Relief Act of 2012, known as ATRA.
While estate tax planning is only one aspect of the estate planning process, the permanence of the new law provides a welcome contrast to uncertainty about exemption amounts and rates that the last 10 years provided.
The new legislation makes permanent the $5 million "applicable exclusion amount" — that is, each person's gift and estate tax "exemption" — and sets the generation-skipping transfer, or GST, tax exemption at the same amount.
The estate, gift and GST taxes are all indexed for inflation going back to 2011, so the starting point for each in 2013 will actually be $5.25 million. This amount will continue to increase periodically in relatively small increments based on the rate of inflation.
The estate tax rate on taxable estates over $5.25 million has been increased from 35 percent to 40 percent.
The concept of "portability," as introduced in 2010 legislation, continues. This means that, if the estate of the first of a couple to die is not large enough to fully utilize his or her applicable exclusion amount, then the unused portion is shifted to the surviving spouse.
For example, if the husband dies first with $3 million of assets, the $2.25 million of his applicable exclusion amount that was not needed to shelter his assets from tax may be transferred to the wife, giving her an applicable exclusion amount of $7.5 million.
In other words, each couple is permitted to shelter as much as $10.5 million-plus from estate tax, regardless which spouse dies first or how their assets are titled.
Keep in mind there are somewhat complex IRS filing requirements to elect portability, including the filing of an estate tax return. Here, see form 706.
These rules vastly simplify gift and estate tax planning for couples, and will alleviate the transfer tax concerns of most single people, as well. More particularly:
Unification of gift and estate tax: The $5.25 million "applicable exclusion amount" can be given during lifetime, and if not used then, is available upon death.
Simplified planning for married couples: If a couple is confident they will never have more than $10.5 million of combined wealth and it is extremely unlikely that the combined estates will ever exceed that figure, they need not do any estate taxplanning. From a gift and estate tax standpoint, the couple could own all of their assets jointly with no disadvantage.
However, a single joint trust or separate trusts might still be advisable to avoid probate proceedings, to provide a receptacle for gifts to children, to obtain a step up on basis, for asset protection, or to impose some limits on the surviving spouse's right to dispose of all of the couple's wealth as he or she sees fit.
Making things easier for the surviving spouse: A couple with less than $10.5 million of combined wealth and no concerns about the surviving spouse's control of their wealth can make things much simpler for the surviving spouse by converting separate trusts to a single joint trust that would serve only as a probate avoidance device and would eliminate the need for separate accountings, additional tax returns, etc., after the death of the first spouse.
No tax reason to transfer ownership of assets:Even if a couple's assets may exceed $10.5 million, there is no need to shift asset ownership to assure that each spouse has a certain minimum amount in his or her individual name, or in his or her trust. Before "portability," minimization of transfer taxes required shifting the title to assets between spouses to assure that neither spouse had more than his or her applicable exclusion amount if the other spouse had less.
For couples who desire more control:If each spouse wants to control disposition of his or her assets when the surviving spouse dies — that is, to assure that the assets pass to the decedent's children and not to the surviving spouse's children from a prior marriage or the surviving spouse's next husband or wife — it will still be necessary to have separate trusts and to identify which assets belong to which spouse.
Pamela J. Tyler and Fredric A. Sytsma are partners in the Estate Planning Group in the law firm of Varnum LLP.