The recent tax legislation dealing with the “fiscal cliff”, which went into effect on January 1, 2013, included significant revisions to the estate tax law that will affect estate planning for the foreseeable future. While you may have previously read about these changes, the following serves as a summary of the exemption amounts for decedents passing away in 2014. These revisions include:
The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news because, for more than ten years, we have been planning with uncertainty under legislation that contained expiration dates. Moreover, while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have some certainty with which to plan.
Estate & Gift Tax Exemption:
The federal gift and estate tax exemption will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for decedent’s passing away in 2013 is $5,250,000. For those passing away in 2014, the exemption amount is $5,340,000. From a practical perspective, this means that individuals can make gifts during life or transfers at death up to this higher exclusion amount, and pay no federal estate tax. In addition, for married spouses, a surviving spouse can combine the deceased spouses unused credit amounts, and pass assets free of estate tax on an estate up to $10.68 million at the death of the second spouse. This is true assuming that none these credits or tax coupons were not used during either spouses lifetime. However, to utilize a deceased spouses credit amount, a comprehensive estate plan must be in place to ensure these tax coupons are preserved. Accordingly, it is crucial to have a properly drafted comprehensive estate plan in place so that you do not pay more estate tax upon your passing.
Generation-Skipping Transfer Tax ("GST") Exemption:
The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption now be “permanent” allows for planning that will greatly benefit future generations. Accordingly, for individuals with a properly drafted estate plan that includes GST planning, $5.34 million can be transferred free from the GST tax. For married couples with estate plans where GST planning is utilized, $10.68 million can be sheltered from the GST tax.
Annual Gifting Program:
Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10.68 million through lifetime gifting and at death. Thus, implementing a well planned lifetime gifting programs offer a simple estate planning technique that can result in significant tax savings.
Prevailing Tax Rates:
The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up trust planning specifically for this purpose. However, there are still many benefits to using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
Annual Gift Tax Exclusion Amount:
Separate from the new tax law, the amount for annual tax-free gifts increased in 2013 to $14,000. This amount can be gifted annually, free from gift tax, to a single person or child each year. Moreover, parents can utilize an estate planning technique known as “gift splitting”, which allows parents to combine annual gifts that are free from gift taxes. Accordingly, with a properly drafted estate plan, a married couple can gift $28,000 to each child each year free from gift tax inclusion.
Annual Exclusion For Gifts To Non-U.S. Spouse:
For gifts made to a non-U.S. citizen spouse, the exclusion amount for annual gifts was $143,000 in 2014. In 2014, the annual exclusion amount for gifts made to a non-U.S. citizen spouse was increased to $145,000.
Foreign Earned Income Exclusion:
The foreign earned income exclusion amount was increased from $97,600 in 2013, to $99,200 in 2014.
Therefore, for most Americans the 2012 Tax Act has removed the emphasis on estate tax planning and put it back on the real reasons to do estate planning: taking care of ourselves and our families the way we want. Those who might be tempted to skip estate planning because their estates are less than the $5 million range should remember that proper estate planning provides peace of mind by allowing Americans to:
1. Avoid state inheritance/death taxes that have lower exemptions than federal taxes;
2. Avoid probate, which can be quite expensive and time-consuming in some states;
3. Ensure their assets are distributed the way they want;
4. Protect an inheritance from irresponsible spending, “creditor’s and predator’s” which includes a child’s creditors, and from being part of a child’s divorce proceedings;
5. Provide for a loved one with special needs without losing valuable government benefits;
6. See that control of their assets remains in the hands of a trusted person;
7. Provide for minor children or grandchildren;
8. Help protect assets from creditors and frivolous lawsuits (especially important for professionals);
9. Protect themselves, their family and their assets in the event of incapacity; and
10. Help create meaningful charitable gifts.
For those with larger estates, ample opportunities remain to transfer large amounts tax-free to future generations. Nevertheless, with the increase in estate and income tax rates, it is critical that professional planning begins as soon as possible. In addition, with Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated. Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.
For those who have been sitting on the sidelines, waiting to see what Congress would do, the wait is over. Now that we have some certainty with “permanent” laws, there is no excuse to postpone planning any longer. Finally, if you are taking the time to read this article, getting your affairs in order by executing a properly drafted estate plan is on your mind. Therefore, instead of making excuses as to why you are not creating your estate plan (i.e. not enough time, etc.) contact a competent estate planning attorney and unburden yourself from this concern—create a comprehensive estate plan—and obtain the piece of mind that you and your family will be taken care of even after you are no longer around.
If you are interested in ensuring that your family is cared for after you have passed away, please call our office at 415-625-0773 to schedule your free estate planning consultation with San Francisco’s premiere estate planning attorney, Matthew J. Tuller.