THE AMERICAN TAXPAYER RELIEF ACT PROVIDES A WELCOME MEASURE OF CERTAINTY IN THE ESTATE TAX ARENA
THE AMERICAN TAXPAYER RELIEF ACT PROVIDES A WELCOME
MEASURE OF CERTAINTY IN THE ESTATE TAX ARENA.
On January 01, 2013 Congress passed and on January 02, 2013 the President signed into law the “American Taxpayer Relief Act” which for the first time in over a decade provides planners a permanent set of Estate and Gift Tax rules.
• The law now sets the “Unified Credit” amount at $5.0 million which is indexed for inflation after 2011. This means that in 2013 a taxpayer may make a lifetime gift or transfer at death in an amount up to $5.25 million free of the Federal Gift or Estate Tax.
• Please Note: Because of the unlimited “Marital Deduction”, a taxpayer may make a gift in any amount to a spouse free of the Federal Gift or Estate Tax)
• Further Note: New York does not have a Gift Tax, but taxpayers domiciled in New York with Estates valued in excess of $1.0 million must still concern themselves with the New York Estate Tax.
• The law makes permanent the concept of “portability” of the Unified Credit amount between spouses. Portability allows the surviving spouse to apply the unused portion of the deceased spouse’s “Unified Credit” amount (called the “deceased spousal unused exclusion”) against any transfer tax liability arising from later lifetime gifts and transfers at death. The result of portability is to insure a married couple can pass up to $10.5 million (in 2013) to their heirs free of the Federal Gift or Estate Tax.
• The applicable rate of the Gift and Estate Tax will rise to 40% in 2013 and after, which is slightly higher than the 35% applicable rate in 2012 but below the 55% rate the tax was scheduled to reach if Congress did nothing
• The law makes permanent the reunification of the Federal Gift and Estate Tax. In 2010, the “Unified Credit” amount for gifts was $1.0 million but the amount for Estates was $5.0 million. Now the transfer tax provides that for both Gift and Estate Tax: (i) the “Unified Credit” amount of $5.0 million; and (ii) the applicable tax rate is 40%.
• The law makes permanent certain provisions of the Generation-Skipping Transfer Tax (GST). The GST tax is a tax (imposed at the highest Estate Tax rate) on gifts made by a taxpayer which skips a generation. Now the GST exemption is equal to the “Unified Credit” amount for the Estate Tax ($5.25 million in 2013 ) and the applicable tax rate is now 40%, the highest tax rate for the Estate Tax.
• The assets in the Taxable Estate of a decedent will continue to receive a “step-up” in tax basis to their fair market value as of the date of a taxpayer’s death. For example, if a taxpayer purchased stock in 1999 for $10/share and the fair market value of the stock is $15/share on the date of his/her death, the tax basis of the stock for purposes of determine gain on a subsequent sale will be $15/share. This eliminates the $5/share gain realized before death and simplifies record keeping for the heirs of the deceased tax payer, in that, they need only research the date-of-death value of the stock, not the historical/actual cost of the stock.