Congress Makes a Final Decision....Sort of!


The New, "Permanent" Estate and Gift Tax Law

Finally, we have certainty...Until Congress changes its mind anyway! Many taxpayers feared a return to the bad old days of a $1 million federal estate and gift tax exemption in 2013. You can breathe a sigh of relief now, as the estate and gift tax exemption is extended permanently to $5 million per person, although the top tax rate is increased from 35% to 40%. This exclusion is also indexed for inflation, but in increments of $1,000, so that the increase is not reflected annually. That means for 2013, the estate and gift tax exclusion amount is $5,250,000 per person. The annual gift tax exclusion has been raised to $14,000 for 2013. These changes are effective January 1, 2013.

By way of example, if a person dies in 2013 with a $6,000,000 estate, the taxable amount is $750,000 ($6,000,000 –$5,250,000 tax exempt amount = $750,000), and the estate will be assessed an estate tax of approximately $300,000 ($750,000 x 0.4 = $300,000).

The new "portability" portion of the law is also now permanent, but it is not automatic - the executor of the of the decedent's estate must timely file a "complete and properly prepared" IRS Form 706. Portability allows the surviving spouse to preserve the unused tax exemption of the deceased spouse to ensure that the married couple uses the total $10M+ federal estate and gift tax exemption.

What does all of it mean for a married couple. Does it mean you should just tear up your present trust and start all over? Do you need just a simple amendment? Do you need a trust at all?

Portability decreases the need for a "tax shelter" trust, also known as an "AB" trust, for the sole purpose of estate tax savings. The AB trust was the most common tool available to married couples to shelter twice the amount of the federal estate tax exemption. For example, in the past, if the exemption was $1M, an AB trust would allow a couple to shelter $2M on their deaths. Therefore, if you and your spouse have an AB trust, you may not need or want it anymore for the purpose of tax shelter. Remember, and AB trust requires administration and some legal fees at the death of the first spouse.

Portability means that even without such a trust, the unused exemption of the deceased spouse can pass to the surviving spouse and be used at his/her death. However, the AB trust has one very important advantage for a married couple to consider: control. If a spouse is interested in protecting his/her children or beneficiaries, and does not wish for the surviving spouse to change his/her beneficiaries, the AB trust allows for such limitations and for control of assets after the death of the first spouse. This is especially important when the family is blended with children from prior unions or one spouse has significantly more assets than the other.

We are recommending that every married couple review their existing plan and discuss these options with their spouse to determine priorities and goals. If you want to make a change to your plan, please call for an appointment.

For additional information on how the American Taxpayer Relief Act of 2012 will affect you and your family, call us at (714) 573-7149 or email: to schedule a consultation about your estate plan, business plan, or family law matter today.

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