As always, we keep you informed of laws and events that impact your wealth management strategy. It’s a new year, the 2013 exemptions are established and many unknowns still lie ahead. If provisions do change, they would not be retroactive – making this is an opportune time to take advantage of the gift tax exemptions.
President Obama signed the American Taxpayer Relief Act of 2012 into law on January 3, 2013. Taxpayers with income under $400,000 ($450,000 for joint filers) were spared from a substantial income tax increase. Tax rates on exemptions would have soared from 35% to 55% and all exemptions would have dropped to $1M. For Boyer & Corporon clients, the permanent extension of tax exemptions brings long-awaited certainty to gift and estate tax law planning and transferring wealth.
The Act set the following exemptions to transferring wealth in 2013:
Federal Estate Tax Exemption: $5M, indexed for inflation or $5.25M, up $130,000 from 2012. Annual indexing will increase this amount each year. Using an approximate 2.4% inflation rate, the exemption should increase by over $100,000 each year.
Federal Gift Tax Exemption: $5M, indexed for inflation or $5.25M. For 2013, the exclusion is $14,000 per recipient and $28,000 per recipient for married couples, up from $13,000 and $27,000 respectively in 2012.
Federal Generation-Skipping Tax Exemption: $5M, indexed for inflation or $5.25M.
There are other significant aspects of the Act as well. The tax rate was raised to 40% from 35% on transferred amounts that exceed the exemptions. The Act keeps portability provisions, which allow spouses to combine their respective estate tax exemptions. Clarification of these provisions will make it easier for married couples to use portability more effectively. All of the transfer tax provisions from 2001 and 2010 tax acts remain intact.
These changes are considered permanent rather than extended temporarily. However, more changes could come as a result of debt-ceiling and federal budget decisions pending on Capitol Hill.
Just as important as what the Act included is what it didn’t include. There are no restrictions on the use of grantor retained annuity trusts or qualifying personal residence trusts. Family business valuations for gift and estate tax purposes were also unaddressed.
Many estate and gift tax provisions have been suggested over the years. There is much left on President Obama’s budget proposal table that could bring further changes such as limiting dynasty trusts to 90 years, ending or limiting grantor trusts for estate planning, restricting availability of valuation reductions in gift transfers and a decade or more year term for GRATS.
Please contact us if you have any questions regarding the Act.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.