Federal Estate Tax Laws Allow Planning Opportunities - Finally!


For over a decade, the federal estate tax law has changed from year to year. The rates have risen and fallen. The federal estate tax exemption went from $650,000 to $1,000,000. Then it increased to $1,500,000, then $2,000,000, and again to $3,500,000, while the gift tax exemption stayed at $1,000,000. For one year there was no estate tax, or more accurately, the estate tax was “optional”. Then the estate tax and gift tax exemptions were re-unified at $5,000,000, but were scheduled to drop to $1,000,000 on January 1, 2013. This roller coaster ride made for some interesting client conversations and challenged definitive planning in this area.

However, in January, the federal estate, gift and generation skipping transfer tax exemptions were set at a base of $5,000,000 and the top estate tax rates were set at 40%. Permanently. There is no more guessing, predicting or assuming what the law will be. It will take an Act of Congress (literally) to change this tax law. The only variable is the annual increase of the federal exemption based on inflation. This idea of "permanency" is a vaguely familiar concept to some of the more experienced attorneys, and provides a framework for client conversations that are far less conditional than the last 10 years allowed.  In short – it allows us to plan with more clarity.

One novel planning tool under the new law is the ability to take advantage of the annual inflationary increase provision. This provision increases the federal exemption (which was $5,000,000 in 2011 and $5,120,000 in 2012) to $5,250,000 in 2013. Traditionally, a client who has consumed his or her federal exemption can rely only on the gift tax annual exclusion to make additional gifts to family members. (This exclusion was $13,000 in 2012 and is $14,000 for 2013.) However, the annual inflationary increase on the $5,000,000 base amount allows a client who has consumed all of his or her federal exemption through prior lifetime gifts to anticipate making far more valuable gifts in each new year.  Through careful and deliberate planning, wealthy clients can use the opportunities provided by the new law to reduce their taxable estates and provide valuable benefits to their families and loved ones.  

This is just one of the new planning opportunities available under the new federal estate, gift and generation skipping tax laws. For more information please contact any member of the Trusts & Estates Group.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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