January 11, 2013   Estate Planning

Thank Congress If You Made Significant Year-End Gifts

By Hank Whittenberg
Top 10 Benefits of the Estate and Gift Tax Provisions in the New Law
The tax act signed into law by President Obama last week provided some very good estate planning provisions. Surprisingly, I have already read and heard complaints from other estate planning attorneys that this new tax act renders the 2012 year end gifting a “waste of time.” This is absurd; quit your whining! These are the same folks who complain that their clients would not make any significant gifts in spite the significant benefits that go with it, tax and otherwise. The one good thing about the “fiscal cliff threat” is that it convinced some to implement plans that should have been implemented already.
 
The American Taxpayer Relief Act of 2012 extended and made “permanent” the estate, gift and generation-skipping transfer tax structure that was in place for 2011 and 2012 with one small change. To the extent an estate or lifetime gifts exceed $5 million, the maximum estate tax rate is 40% instead of 35%. As an estate planning attorney, I view this as relatively well balanced and beneficial. The Republicans wanted a complete repeal of the estate and gift tax and the Democrats wanted a $3.5 million exemption, so neither side of the aisle got what they wanted.
 
Here are my top ten benefits of the estate and gift tax provisions in the new law:
 
  1. Predictability: Taxpayers now have some reasonable estate tax expectations for the foreseeable future so they won’t be paralyzed by “what Congress might do in the future.”
     
  2. Unified Gift and Estate Tax: Since the exemption amount for an estate is now permanent there was no need to split the gift tax exemption and the estate tax exemption like it was in the 2001 law. This structure is easier to understand and planning can be more straight-forward.
     
  3. Generation-Skipping Transfer Tax: Having the same levels makes planning for multiple generations simpler (but still not without traps for the unwary).
     
  4. Indexing: The exemption amounts are indexed for inflation, providing even longer term clarity in planning that is aligned with real economic effect.
     
  5. Rate: The current maximum estate tax rate for estates with more than $5,250,000 in 2013 is 40%. Yes, I see this as beneficial. Perhaps it’s my age but is seems like it was only yesterday that the maximum estate tax rate was 55% (actually 60% for estate between approximately $10 and $20 million).
     
  6. Portability: Portability permits a surviving spouse to use a deceased spouse’s unused exemption amount. Caution! To take advantage of this benefit, an estate tax return must be filed for the deceased spouse. This is a simple concept but tedious to complete. In other words, easier said than done.
     
  7. Grantor Trusts: Plans can be designed that require the grantor to pay income tax on a trust that is not included in their estate upon death. In effect, each year that the Grantor pays taxes for the trust, the trust is growing tax-free for the beneficiaries. Over the long run this is an enormous benefit. Note: President Obama has proposed that this strategy be eliminated.
     
  8. Perpetual Trusts: Many states like New Hampshire provide ways to create a trust that will last as long as the assets survive. In the days of olde, all trusts were required to terminate at a specific time in the future, most often measured by “lives in being.” If this notion intrigues you I encourage you to pick up a copy of Loring and Rounds, A Trustee’s Handbook (2013). No, I do not get paid for the product placement! Note: President Obama has proposed that perpetual trusts be eliminated.
     
  9. Tax Leveraging Trusts: Without getting into a technical explanation, we can still use two year rolling GRATs (Grantor Retained Annuity Trusts – call us if you would like to learn about GRATs). In the right situation these are very powerful wealth transfer tools. Note: President Obama has proposed that a minimum term for GRATs be 10 years which eliminates much of the benefit from them.
     
  10. Predictability: Not because I have run out of things to say but because it’s worth stating twice. OK, if you want something new: we still have the step-up in basis – that’s a huge benefit from a capital gain tax standpoint and from an administrative standpoint.
Editor's Notes:

View a recorded webinar on "The American Taxpayer Relief Act: How the New Law Reshapes the Future of Estate Planning." 

About the Author:

William (Hank) has concentrated his practice on wealth transfer and wealth preservation for the past 18 years. This includes general estate planning, sophisticated estate and gift tax planning, charitable estate planning and asset protection planning, including planning for long term care and elder law. Unlike many estate planning attorneys, Hank recognizes that “wealth” often means more than financial wealth and many of his clients create plans that reflect their family’s values, traditions and culture. Before joining the firm in 2011 he was one of the founding partners of Whittenberg Knudsen, LLP.
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