Highlights from the American Taxpayer Relief Act
Volume 3 • Issue 1 • January 2013
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business planning and charitable planning issues. This month's issue will discuss some highlights from the American Taxpayer Relief Act. If you are interested in learning more about the ideas discussed in this newsletter please contact us for a free initial consultation.
The American Taxpayer Relief Act of 2012 (ATRA) was signed into law on January 2, 2013. ATRA was intended as a partial resolution of the so-called “fiscal cliff” issues resulting from the expiration of certain provisions of prior legislation commonly referred to as the “Bush Tax Cuts.” This issue of The Counselor will provide a brief look at selected provisions of the new law that may affect you.
Estate, Gift and Generation Skipping Tax Exemption
As a result of expiring provisions in 2001 and 2010 laws, the 2012 exempt amount on estate, gift, and generation skipping taxes was scheduled to revert from $5.12 million back to $1 million per person. In addition, “Portability,” which allows the executor of the deceased spouse's estate to transfer any unused federal estate tax exemption to the surviving spouse on a timely filed estate tax return, was also scheduled to go away.
With the passage of ATRA, the exemption level for estate, gift and generation skipping taxes was made permanent at $5 million (inflation adjusted and estimated to be at $5.25 million for 2013). Portability was also made a permanent fixture of the estate tax code. One notable change was the increase in the tax rate, with the highest rate moving from 35% to 40%. While this is an increase, it is not as much as the rate would have been (55%) without action.
The new law did not take on any of the strategies that were purported to be in danger, such as: subjecting grantor trusts to the estate tax; valuation discounts; minimum terms for GRATs; and maximum terms on Dynasty Trusts.
While not part of ATRA, it is important to note that the annual gift tax exclusion amount has been increased from $13,000 to $14,000 per person per year. By making annual tax-free transfers while you are alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing your taxable estate and removing future appreciation on assets you transfer. You can enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity and claiming a “discounted” value for transfer tax purposes, allowing you to transfer more free of tax.
Those who engaged in year-end planning may be asking whether it was “worth it,” given the ultimate action by Congress on January 1. The answer is without question "yes”. In addition to the uncertain bet that Congress would actually act on this issue, with the possibility of increased scrutiny over the grantor trust rules, and possible changes coming in 2013, Grantor trusts created in 2012 are likely safer than trusts created or funded in 2013. Further, if the planning was a good idea that could have been lost, it is still a good idea. The deadline simply served as a motivation to get needed planning completed. Finally, transactions completed in 2012 will have had the benefit of starting the clock earlier on the three-year statute of limitations. The three-year statute of limitations begins as soon as the return is filed.
IRA Transfers to Charity
ATRA extended a number of provisions that had expired at the end of 2011 through the end of 2013. Among these is the direct transfer from an IRA to a charity. Subject to certain limitations, in 2012 and 2013 each individual Taxpayer can make up to $100,000 in direct IRA distributions to charity without having to include the distribution in gross income. Among other requirements, the IRA owner must be at least 70½ on the day of the transfer and the transfer must be a direct transfer from the Trustee of the IRA to the Charity. For a distribution to count for 2012 it must be made on or before January 31, 2013. Distributions to the taxpayer in December of 2012 may be treated as a qualified charitable distribution if certain actions are taken in January of 2013.
Capital gains rates have become a lot more complicated to decipher. In many cases the answer to what you will pay in capital gains will not be capable of determination until preparation of your tax return. Paul Nieffer at FarmCPA Today indicates, “After reviewing the various phase-outs of itemized deductions and personal exemptions based upon gross income plus the implementation of the new 3.8% investment surtax, for 2013 there are now at least 10 different possible maximum long-term capital gains and qualifying dividends tax rates. The rates range from zero for that portion in the 10-15% tax bracket up to almost 25% for those taxpayers with income in excess of the 20% maximum capital gains threshold amount (currently $400,000 – single and $450,000 – married filing joint).”
These are just a few of the many provisions that came into effect, were extended, or made permanent through ATRA. For most Americans, ATRA has put the emphasis back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want. These include:
Protecting you, your family, and your assets in the event of incapacity;
Ensuring your assets are distributed the way you want;
Protecting your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
Providing for a loved one with special needs without losing valuable government benefits; and
Helping protect assets from creditors and frivolous lawsuits.
For those with larger estates, significant opportunities remain to transfer large amounts tax free to future generations, but it is important that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.
If you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over. Now that we have increased certainty with “permanent” laws, there is no excuse to postpone your planning any longer. If you have questions about these or any other planning issues, please call our office to discuss how you and your family may benefit.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.