Gift and Estate Tax Changes in the American Taxpayer Relief Act of 2012

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On January 1, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “2012 Act”) that was passed by Congress during the past 72 hours, bringing closure to the main tax aspects of the so-called “fiscal cliff” negotiations that have been ongoing since the November election.

Among its many tax provisions, the 2012 Act makes permanent the $5.0 million gift, estate, and GST tax exemption amount that was put in place temporarily for 2011 and 2012, plus inflation adjustments going forward. The IRS has not yet issued any official guidance for the inflation adjustment for 2013, but in 2012 the inflation-adjusted amount was $5.12 million, and it appears the inflation-adjusted amount in 2013 will be approximately $5.25 million per person. For married couples in 2013, the aggregate exemption will be twice this amount (i.e., approximately $10.5 million). Future years will likewise have similar inflation adjustments.

The 2012 Act also provides for a flat 40% tax rate for any transfers in 2013 and future years that exceed the $5.25 million gift, estate, or GST exemption amount.

Notably, the 2012 Act also makes permanent the “portability” concept whereby the unused estate tax exemption amount of the first spouse to die can be passed to the surviving spouse for later use by the surviving spouse (either during life or at death). For example, if the first spouse passes away in 2013 with $2.25 million of assets, that deceased first spouse will have a $3 million “unused estate tax exemption amount,” which can be passed to the surviving spouse. This would give the surviving spouse a total of $8.25 million of gift and estate tax exemption going forward, subject to further limitation if a later marriage occurs.

Other notable changes for 2012 in this area include an inflation adjustment to increase the annual gift tax exclusion from $13,000 to $14,000 per donee. Again, for married couples, the annual gift exclusion is now double this amount - $28,000 for 2013.

These significant gift and estate tax law changes will hopefully bring a degree of stability to an area of tax law that has been under constant revision and uncertainty for the past twenty years.

IRA Charitable Contribution Nugget – One interesting provision in the 2012 Act relates to charitable contributions made from IRA’s for those who are over age 70 ½ and take “required minimum distributions” (“RMD's”). The 2012 Act extends the prior “charitable rollover” treatment from 2010 and 2011 law to 2013 charitable contributions of up to $100,000 from an IRA. It also allows individuals who took their 2012 RMD in December, 2012 (but apparently not during the prior 11 months of 2012) to make charitable contributions prior to February 1, 2013 of up to $100,000, and have such charitable contributions treated as if made in 2012 from their IRA, thereby offsetting the 2012 income from their RMD.

The BABC Trusts & Estates Group wishes you and your family a Happy New Year, and of course, if you have any questions regarding these matters, please do not hesitate to call any of us.