The American Taxpayer Relief Act of 2012 (ATRA) was signed into law on January 2, 2013, ending twelve years of uncertainty concerning the federal estate, gift and generation-skipping tax rates and exemptions.
With the passage of ATRA, the estate, gift and generation-skipping tax exemption amounts remain fixed at $5 million per person (indexed annually for inflation to a 2013 amount of $5.25 million per person).
Under the new law, the maximum estate tax rate increases from 35% to 40%. Other key features of ATRA include:
- Making permanent the "portability" election, which allows a surviving spouse to use a predeceased spouse's unused estate tax exemption.
- Making permanent the deduction against federal estate taxes for the state estate taxes paid, replacing a prior tax credit for state estate taxes.
- Continuing the historical income tax basis adjustment at death, which provides for an adjustment in income tax basis to the date-of-death value of assets owned at death.
- Preserving the ability of farms and closely held businesses with 45 or fewer partners or shareholders to pay estate taxes in installments.
- Preserving the ability of taxpayers over 70½ to exclude from income, payments up to $100,000 in 2013 from an IRA, made directly to a charitable institution.
- Increasing the long-term capital gains rate from 15% to 20% if ordinary income falls in the 39.6% tax bracket. The new 3.8% surtax on investment-type income and gains after 2012 also applies for those with income exceeding $200,000 (single) and $250,000 (joint filers).
The passage of ATRA indicates that significant gifts made in 2011 and 2012 will not cause additional estate or gift tax in later years if the exemptions are set below the current $5 million.
For those who did not fully utilize the estate, gift and generation-skipping transfer-tax exemptions in prior years, the window of opportunity remains open. The gifting landscape in 2013 and beyond, however, involves an analysis of several factors under ATRA, including:
- The basis of the asset to be gifted, and whether it is more advantageous to hold the asset until death to receive a step-up in basis or subject the recipients of the gift to capital gains tax upon sale.
- State estate taxes, and whether the avoidance of state estate taxes by gifting now outweighs the benefits of the basis step-up on the asset.
- "Portability," and whether it makes sense to elect the carry over of a deceased spouse's unused exemption amount.
The newfound stability of the estate, gift and generation-skipping tax laws also opens the door to long-range, in-depth planning approaches that may have been set aside during the years of uncertainty. Consider the following:
- Business Succession Planning: You may have gifted stock in a closely held business to the next generation for tax-planning purposes, but are the upcoming owners and managers ready to carry the torch? Is the senior generation ready to transfer control? Taking a closer look at leadership, governance and ownership is an important first step in addressing the array of issues associated with the succession of a business.
- Stewardship of Family Wealth: What does the next generation need in order to become good stewards of family wealth for future generations? Do they need to learn more about estate planning, finances and investments, and charitable giving? Do they need to practice working with each other as a team to manage wealth? Having a regular family meeting featuring important financial topics can build a foundation for good stewardship.
- Philanthropy: If you have developed your own philanthropic goals, have you shared them with your family members? Do you have common goals that will bridge the generational gap, leading to more meaningful giving? Consider creating a philanthropic plan and utilizing legal strategies, such as private foundations, donor-advised funds, charitable trusts and charitable annuities, that will support this plan.