Major Changes to the Estate and Gift Tax Looming

With the "fiscal cliff" discussions centering on income tax rates and spending cuts, don't forget about the major changes to the estate and gift tax system that take place on January 1, 2013.  The chart below outlines several of these changes, absent any new legislation.

	2012	2013
Annual gift tax exclusion	$13,000	$14,000
Lifetime gift & estate tax exclusion	$5,120,000	$1,000,000
Lifetime generation skipping tax exclusion	$5,120,000	$1,430,000
Top gift & estate tax rate	35%	55%
Flat generation skipping transfer tax rate	35%	55%
Portability of deceased spouse’s unused exemption amount	Available	Unavailable

In addition to these statutory changes, Pres. Obama has proposed a variety of changes to reduce or eliminate the benefits of certain estate and gift tax planning strategies.  Whether any of the following proposals will be enacted remains to be seen.  If enacted, these proposals could increase gift and estate taxes much more than the taxes raised from reduced lifetime exemption amounts.

·       Eliminate valuation discounts for the transfer of closely-held businesses or gifts among family members.

·       Grantor-retained annuity trusts may be required to have at least a 10-year term and some minimum gift amount that effectively eliminates the benefits of a short-term, zeroed-out GRAT.

·       Sales of assets to “defective” grantor trusts could be rendered ineffective by requiring the value of assets in such trusts to be taxed as part of the estate.

·       Dynasty or descendants’ trusts might be limited to 90 years in duration at which time the generation skipping tax could apply.

Although there isn’t much time left before the end of 2012, be sure to consider the following gift and estate tax planning strategies to secure tax benefits for your family that might not be available in full after 2012.  Note that estate planning attorneys are becoming booked with appointments and it could be difficult to draft and implement any sophisticated strategies by year-end if you wait much longer.

 

·       Be sure to make annual exclusion gifts.  While the annual exclusion amount renews each calendar year, any unused exclusions from previous years do not carry over.  Remember that checks must be cashed by December 31^st, so consider using cashier’s checks.

·       Direct payments of tuition to educational institutions and of medical expenses to health care providers do not count against either the annual or lifetime exclusion amounts.

·       Consider making a gift of the full $5.12 million to an irrevocable trust for your descendants.  A spousal lifetime access feature can be added if there is a concern about whether your spouse might need some benefits from these assets in the future.  The trust can also be designed to last for multiple generations without an estate tax being imposed at each generation.

·       Consider using a GRAT or a sale to a defective grantor trust as part of your estate planning.

Selected 2013 Inflation-Indexed Figures

Many contribution and deduction amounts in the tax law are indexed for inflation.  Many also have statutory adjustments.  While there remains substantial uncertainty about whether the “lame duck” Congress will enact any new tax laws before the end of 2012, some important 2013 inflation-adjusted figures have been released and are as follows:

·       The contribution amount for traditional and Roth IRAs is $5,500 (up from $5,000 in 2012).  For those who are age 50 and older in 2013, the additional “catch-up” contribution remains $1,000.

·       The modified adjusted gross income phase-out range for contributions to Roth IRAs is from $178,000 to $188,000 for joint filers (up from between $173,000 and $183,000 in 2012); and from $112,000 to $127,000 for single filers (up from $110,000 and $125,000 in 2012).

·       The contribution amount for traditional and Roth 401(k) accounts is $17,500 (up from $17,000 in 2012).  For those who are age 50 and older in 2013, the additional “catch-up” contribution remains $5,500.

·       The limit on the annual additions to a participant's defined contribution account is $51,000 (up from $50,000 in 2012).

·       The annual exclusion from gift tax is $14,000 per donee (up from $13,000 in 2012).

·       The personal exemption is $3,900 (up from $3,800 in 2012).

·       The Social Security tax wage base is $113,700 (up from $110,100 in 2012).

·       The maximum annual contribution to a health savings account is $3,250 (up from $3,100 in 2012) for an individual-coverage-only health plan, and $6,450 (up from $6,250 in 2012) for a family-coverage health plan.  For employees age 55 and older in 2013, the additional HSA "catch-up" contribution remains $1,000.