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Roundup Of New Estate Tax Changes

For more than a decade, estate planning has harkened back to the “wild, wild west,” a time when even the best hired guns didn’t know what would happen next.  Now, finally, there’s more certainty, thanks to the estate tax provisions in the American Taxpayer Relief Act (ATRA).  The new law, signed as the country teetered on the brink of the “fiscal cliff,” extends several favorable tax breaks, with a few modifications.

Before we explore ATRA’s main provisions, let’s recap the events dating back to 2001, the year the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was enacted.  Among the changes, EGTRRA gradually increased the federal estate tax exemption from $1 million to $3.5 million in 2009 while decreasing the top estate tax rate from 55% to 45%.  It also severed the unified estate and gift tax systems, creating a lifetime gift exemption of $1 million unrelated to the estate tax exemption.  Then the law repealed the estate tax completely, but just for 2010.  After that year, the estate tax provisions were scheduled to “sunset,” restoring more onerous rules that had been in effect before EGTRRA, unless new legislation dictated otherwise.
The Tax Relief Act of 2010 generally postponed the sunset for two years.  It hiked the estate tax exemption to $5 million (indexed for inflation), lowered the top estate tax rate to 35%, and reunified the estate and gift tax systems. That law also allowed “portability” of exemptions between spouses.

Now, at long last, ATRA brings permanent clarity.  Here are the key estate changes:

  • The estate tax exemption remains at $5 million with inflation indexing.  For 2013, the exemption is $5.25 million.  Also, portability of exemptions between spouses is made permanent, so a married couple can effectively pass up to $10.5 million tax-free to their children or other non-spouse beneficiaries, even if the exemption of the first spouse to die isn’t exhausted.
  • The top estate tax rate is bumped up to 40%.  Not as low as the 35% rate in 2011 and 2012, but still better than the 55% rate slated for 2013 prior to ATRA.
  • The estate and gift tax systems remain reunified.  This means that the lifetime gift tax exemption is equal to the estate tax exemption of $5.25 million in 2013.  (That’s now the maximum exemption for combined taxable lifetime gifts and estate bequests.)  Other provisions, including the generation-skipping tax that applies to most bequests and gifts to grandchildren, are coordinated within the system.

As a result of these changes, now is a good time to examine wills, trusts, and other aspects of your estate plan.  Depending on your situation, revisions may be required or you might create a new trust to take advantage of the current estate tax law.

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