Estate Planning Tips – Part I


Kimberly Hegwood
Kimberly Hegwood

The article below is the first in a 2-part series on estate planning written by a friend or mine who happens to be a leading estate planning attorney.  The second part of the series will be posted tomorrow.

Her offices are in the southern part of Harris County, TX.  If you live in Texas and your estate is approaching the $5,000,000 value, I encourage you to visit her website and contact her or one of her associates.

On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (the 2012 Tax Act) to deal with the so-called “fiscal cliff.” The 2012 Tax Act included revisions to estate, gift and generation-skipping transfer (“GST”) tax laws and income tax laws that will affect estate planning for the foreseeable future. In this edition of The Wealth Counselor, we will take a first look at those changes and what they will mean to you, your clients and your practice.

Changes to the Federal Estate Tax Law

* The federal gift, estate and GST tax provisions that had been put in place as temporary measures in December 2010 were made permanent as of December 31, 2012. This is great news because, for more than ten years, we have had uncertainty due to the fact that the estate, gift, and GST exemptions and rates, and basic income tax provisions and rates, all had expiration dates. And while “permanent” in Washington only means this is the law until Congress decides to change it, at least we now have some certainty with which to plan.

* The federal estate and gift tax exemption will remain at $5 million per person, adjusted annually for inflation after January 1, 2011. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is $5,250,000.  This means that the opportunity to transfer large amounts during lifetime or at death remains.

Planning Tip: If your clients did not take advantage of the $5+ million gift tax exemption in 2011 or 2012, they can do so now—and there are significant advantages to doing so sooner rather than later, as discussed below.

Planning Tip: For clients who used their full $5.12 million exemption in 2012, they have an additional $130,000 exemption they can use in 2013. And, with the exemption amount now tied to inflation, they can expect to be able to transfer even more each year.

* The Generation-Skipping Transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). The GST tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) and “skip” a generation—for example, a gift to a living child’s descendant.

Planning Tip: Having this permanent GST exemption will allow you to take advantage of planning that will greatly benefit future generations. For example, a dynasty trust that is properly set up can now last forever, and the trust assets should never be subject to federal estate, gift or GST tax.

Planning Tip: The downside of not having trust assets subject to estate tax is that they do not get a basis adjustment to fair market value at death. However, with proper planning, it is possible to elect estate inclusion at the death of a beneficiary to take advantage of the basis adjustment when the beneficiary does not have an otherwise taxable estate.

* Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.

* The tax rate on estates larger than the exempt amounts was increased from 35% in 2012 to 40% in 2013 and beyond.

* The “portability” provision, which allows an executor to transfer the unused exemption of the first spouse to die to the surviving spouse, was also made permanent. While this may at first glance appear to be an easy way to use both spouses’ estate tax exemptions, problems remain. For example, if the surviving spouse remarries and dies before spouse #2, all of spouse #1’s exemption is
lost. Also, there is significant cost to using the “portability” provision
because it requires filing an estate tax return, and there is no “portability” of any unused GST tax exemption.

Planning Tip: Trust planning remains the best option. It makes excellent use of both spouses’ estate and GST tax exemptions. Trust planning can also provide for a surviving spouse and let the first spouse to die keep control over how his/her share of assets will  be managed and distributed. This is important if there are children, and it is critical if there are children from a previous marriage.

* Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 in 2012 to $14,000 in 2013 as a result of an inflation adjustment. This means your clients can now give up to $14,000 to as many individuals as they wish each year, and not pay a gift tax. For married clients, the spouse can join and, together, both spouses can give up to $28,000 per person per year.

Planning Tip: Annual tax-free gifts are in addition to the $5+ million gift and estate tax exemption. This is another opportunity for clients to transfer significant amounts out of their estates.

Changes to the Federal Income Tax Law:  In addition to these changes to the federal gift, estate and GST tax laws, there are several changes to the federal income tax laws, including several income tax increases that can be mitigated by proper planning:

* The 2% Social Security tax holiday that was instituted as a stimulus measure
was not extended, so everyone will see a decrease in net pay.

* Ordinary income tax rates increase from 35% to 39.6% for singles earning more than $400,000 a year ($450,000 a year for married couples). All other ordinary income tax rates effective in 2012 were made permanent.

* There is a new Medicare 0.9% surtax on ordinary income and a new 3.8% surtax on investment income. Both are applicable to income over $200,000 for singles ($250,000 for married couples) and were part of the 2010 health care bill.

* The top capital gains and dividend rate increased to 20% for those earning
more than $400,000 a year ($450,000 for married couples).

* The AMT exemption is now permanent. For 2013, it increased to $50,600 for
single and to $78,750 for married taxpayers, with the exemption and phase out amounts indexed for inflation.

* Several business provisions were extended, including the R&D tax credit,
work opportunity tax credit, accelerated depreciation, and Section 179 levels.

* The direct IRA to charity transfer for those over 70.5 years of age was
reinstituted retroactive to 2012. A special catch-up rule allowed transfers in
January 2013 to be counted as 2012 distributions.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

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