Permanent Estate, Gift and GST Exemptions and Rates
The American Taxpayer Relief Act of 2012 was signed into law on
January 2, 2013, and has finally provided a degree of certainty
regarding the federal transfer tax system, making permanent the
exemption levels from the 2010 Tax Relief Act. This means that the
federal estate, gift and generation-skipping transfer
("GST") tax exemptions are all set at $5 million, indexed
each year for inflation. The rate for each of these taxes on
transfers in excess of the exemption amount increased from 35% to
The Act also makes permanent the provisions introduced in the
2010 legislation that allow a surviving spouse to make use of the
unused federal estate tax exemption of a deceased spouse. These
provisions do not apply to the $1 million exemption from the
Massachusetts estate tax (or on similar exemption amounts in other
states that impose an estate tax), and do not apply to the GST tax
exemption. This provision has the potential to make estate planning
simpler for some clients, but in many cases relying on these
provisions will not produce optimal tax reduction.
Taking Another Look
While many existing estate planning documents contain formulas
which will allow you to get the maximum tax benefits from the newly
permanent higher exemption amounts, you should review your estate
plan to make sure that the formulas produce the results you want
from a personal perspective. For instance, in light of the higher
A Family Trust, typically for your spouse and descendants,
which previously would have been funded with $1 million will now be
funded with $5 million (indexed), effectively reducing the amount
set aside for the surviving spouse's sole benefit.
A trust for grandchildren intended to hold assets exempt from
GST tax would have held $1.5 million in 2004 or 2005 but will
receive $5 million (indexed) if created under the trust instrument
of a donor who dies now, potentially reducing the amount available
In many instances a simple change such as a cap on funding
amounts may address this concern, but you also may wish to revise
your plan more broadly to take advantage of the opportunities
afforded by larger exemption amounts.
Continuing Opportunity for Lifetime Gifts
Lifetime gifts continue to be an excellent method of using the
newly permanent exemption amounts to minimize overall transfer tax
exposure. Benefits of making lifetime gifts include:
Allowing recipients to enjoy transferred property during your
Keeping future appreciation on the transferred property out of
Taking advantage of current tax laws which may be changed by
proposals currently before Congress, such as an effort to limit the
maximum term of GST trusts.
Charitable Rollovers from IRAs
The American Taxpayer Relief Act of 2012 reinstates and extends
until the end of 2013 the IRA charitable rollover opportunity
previously available through the end of 2011. The Act permits
direct charitable rollovers by taxpayers 70½ or older of up
to $100,000 from traditional and Roth IRA accounts to certain
charities other than private foundations and donor-advised funds.
In order to take advantage of this opportunity for 2012, you must
make the distribution by February 2013. This technique allows
donors to avoid income tax on charitable contributions that might
otherwise be subject to deductibility limits, and it also might
lower a donor's state income taxes in certain states.
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This is not a major news story for most Americans, but if you participate in a defined benefit retirement plan, one where you are due to receive regular payments of a fixed amount monthly when you reach retirement; pay heed: Bad things are happening.
You may have an "AB Trust" or "ABC Trust," or a Family Trust that creates a Decedent's Trust (also referred to as a "Bypass Trust") and a Survivor's Trust on the death of the first of you or your spouse.
Trustees are often granted the power to distribute trust property "in the Trustee’s discretion" for a beneficiary’s "general well-being," "best interests," "comfort," or, most commonly, "health, education, maintenance and support."
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