Estate Tax Planning

The Importance of Estate Tax Planning in 2013

Our firm has remained on top of all of the changes in the estate tax, and we experienced in implementing the estate tax plans that help ensure that our clients plan effectively to minimize the imposition of both federal and federal and New York State estate tax.

The playing field has changed this year: On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the Act) into law. The Act retained the $5 million lifetime exclusion, and made it permanent. Estate tax planning, once concerned primarily with the estate tax, is now more focused on income tax aspects. The concept of “portability” now allows a couple to effectively shield $10.5 million in assets from Washington.  However, the GST exemption is not portable. The gift tax has been permanently reunified with the estate tax. The annual exclusion amount is also now adjusted for inflation, but in $1,000 increments. The annual exclusion amount for 2013 is $14,000.

Although Congress has considered eliminating the ability of taxpayers to utilized minority discounts or lack of transferability discounts, courts have sanctioned the viability of these discounts. Our planning continues to use these important principles in reducing the potential estate tax liability of our clients’ estates.We believe that the IRS will continue to challenge efforts by taxpayers to achieve basis step-up through the use of grantor trusts when utilizing portability, by substituting assets of equal value. In essence, the estate tax playing field has changed drastically for the IRS, but the Treasury is not without the ability to enact new measures to prevent a total collapse of tax imposed on generational transfers.

The inflation-adjusted amount of the federal lifetime exemption for 2013 is $5.25 million. The Act creates a 40 percent maximum tax rate on gifts, estate and generation-skipping taxes, which rate is higher than the 2012 rate of 35 percent, but lower than the 55 percent rate to which it would otherwise have reverted but for the Act. Even for persons whose estates are less than $5 million, New York continues to tax estates in excess of $1 million.

While individuals are not subject to the new 39.6 percent top rate until their income exceeds $400,000, trusts become subject to that tax when income exceeds only $11,950. Trusts may also be subject to the 3.8 percent Medicare surtax, thus resulting in a top rate of 43.4 percent. Trustees can, to a considerable extent, avoid the tax by distributing income to beneficiaries in lower brackets. Alternatively, choosing grantor trust status would also obviate the problem.