Estate Planning After the American Taxpayer Relief Act

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Congress adopted the American Taxpayer Relief Act (the Act), effective January 1, 2013. The Act made permanent tax rates and exemptions for estate, gift, and generation-skipping transfer (GST) taxes. Prior laws incorporated “sunset” provisions for tax rates and exemptions that made long-term estate and gift planning difficult. The new law deletes references to sunsets.

Key provisions of the Act include:
  • The maximum estate, gift, and GST tax rates are 40%, up from 35% in 2012, but less than the 45% top rate proposed by the Obama Administration.
  • The estate, gift, and GST tax exemptions remain unified and at $5,000,000 per person, adjusted for inflation. For 2013, the exemption as adjusted is $5,250,000.
  • The concept of portability, which allows the unused estate and gift tax exemption of the first spouse to die to be used by the surviving spouse, has been continued under the Act.
  • The Act extended, through 2013, the ability to make tax-free distributions from traditional and Roth individual retirement plans to charity of up to $100,000 for individuals who have reached age 70½.
It is also important to understand what did not change as a result of the Act:
  • The Act does not prohibit the use of discounts in valuing interests in business entities for transfer tax purposes, as had been proposed by the Administration. Therefore, such discounts continue to be available.
  • The use of intentionally defective grantor trusts in estate and gift planning can continue as Congress did not adopt a proposal by the Administration that assets in such a trust must be included in the estate of the grantor.
  • Short-term grantor retained annuity trusts (GRATs) remain a useful estate planning tool. A proposal to require GRATs to have a minimum term of ten years was not adopted by Congress.

So what does this mean for the client?

Assuming that we can rely on Congress’ promise that these changes are permanent, it will make estate and gift planning somewhat easier and long term planning more effective.
  • Clients will initially need to review their current documents to determine whether any changes are warranted as a result of the Act. However, frequent reviews every year or two each time Congress has made substantial changes in the law will no longer have to be made. Of course, changes in client assets, testamentary goals and family situations may require modifications to documents. We continue to recommend that clients review their estate plans every five to ten years.
  • Estate plan documents often include the use of a “credit shelter” or “family trust” funded with the amount equal to the estate tax exemption in order to avoid estate taxes at the death of the surviving spouse. Single clients whose assets total less than the exemption, and married couples whose assets total less than the combined exemption, will need to decide whether to continue to use such family trusts in their estate planning documents. However, there are numerous other reasons to use such trusts in an estate plan, such as for creditor protection, avoidance of mismanagement of assets by the surviving spouse and preservation of assets for minor children and other beneficiaries. In many cases, such a trust will still offer advantages over portability of the estate tax exemption.
  • In the case of a credit shelter or family trust established by the estate of a spouse who has previously died, the higher estate tax exemption available to the surviving spouse may make such trust unnecessary from an estate tax planning viewpoint, although, as discussed above, there may be other reasons to continue such a trust. For those clients interested in the possibility of terminating a previously funded credit shelter or family trust, please see “Termination of Credit Shelter Trusts.”

We recommend that clients meet with their estate planning attorney to discuss these changes in detail and determine whether any changes in their documents should be made.