Estate Planning For The Long Run

Estate Planning For The Long Run

Fiscal Cliff Deal: Impact on Estate Planning and Gifting

January 8, 2014

The wait is over, at least for now. Congress passed a bill on January 1, 2013 that avoided the “fiscal cliff,” and is expected to be signed into law shortly. The new deal has some important consequences for estate planning and gifting.

Estate and Gift Tax

The good news is that the favorable $5 million estate and gift tax exemptions have been permanently extended. This means that the $5 million exemptions are not set to expire, as in the previous deal, but will remain indefinitely until Congress passes a new bill that changes it. This is important because it not only extends the exemptions, but it also avoids creating a new “fiscal cliff.” As a result, we will not have to speculate as to what will happen in the future because there is no deadline or uncertainty looming in the future. For now, we are assured that estates are exempt from tax up to $5 million, and lifetime gifts are exempt from tax up to $5 million.

More good news is that the exemptions still get indexed for inflation. Thus, the exemptions for 2013 increase to $5,250,000, up from $5,120,000 for 2012. Additionally, the exemptions retain their portability. This means that if a deceased spouse does not use up all of his/her exemption, the unused portion passes to the surviving spouse. Thus, a surviving spouse potentially can have up to $10,500,000 of estate and gift tax exemptions for 2013.

Annual Gifting

Other good news is that the annual gifting exclusion increases to $14,000 per year. This means that you can make a gift of up to $14,000 each year to an unlimited number of individuals, and those gifts will not use up any of your $5,000,000 gift tax exemption. The previous exclusion was $13,000 for 2012. This exclusion applies to each individual. Thus, both spouses can make separate $14,000 gifts to any individuals without using up their lifetime exemptions.

Estate and Gift Tax Rate

The seemingly bad news is that the estate and gift tax rates increased from 35% to 40%. However, this is actually good news because the rates were set to increase to 55% if a new deal was not reached. Considering the circumstances, the new 40% tax rate is still generous in comparison to what it has been in the past, and what it would have been with the fiscal cliff.

Generation Skipping Transfer (GST) Tax

The new deal also calls for an additional 40% tax on a transfer that is made 2 or more generations below the transferor of the gift. In other words, if a grandparent made a transfer to his/her grandchild, it would be subject to an additional 40% tax after any estate or gift tax was applied. However, you can still shelter up to $5 million worth of assets from the generation skipping transfer tax.

Medicare Tax

The bad news here is that the new 3.8% Medicare tax rate on net investment income applies to not only individuals, but also to trusts and estates. In other words, any net investment income earned on a trust or estate is subject to 3.8% Medicare tax.

Overall, the new deal is favorable for estate planning and gifting. The exemption amounts are high and permanent, and the new tax rate is relatively low. In general, although the new deal did not address every uncertain estate planning issue, but it finally solidified the estate and gift tax uncertainties that loomed in the previous years