Home Fairfield The state of the estate tax and why planning remains critical

The state of the estate tax and why planning remains critical



For estate planning professionals, the final quarter of 2012 brought a marked increase in client gifting to younger generation family members. This increase was due, in large part, to the threat of decreased exemptions relating to the federal estate, gift and generation-skipping taxes, and impending increase in marginal tax rates that began Jan. 1.

The Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, passed Dec. 17 of that year, significantly extended the Bush tax cuts that had been in place since 2001. In particular, the federal estate, generation-skipping and lifetime gifting exemptions were increased to $5.12 million and the top marginal estate tax rate was reduced to 35 percent (down from a top rate of 55 percent in 2001).

In addition to the increase in exemptions and decrease of marginal tax rates included, the 2010 legislation also introduced the concept of “portability” between spouses. Portability allows a surviving spouse to fully utilize a predeceased spouse’s remaining unused estate tax exemption without retitling assets and creating marital trusts. Simply put, in some instances, portability makes it relatively easy for most couples to pass up to $10.24 million to children and other family members with relatively basic planning.

The provisions enacted by the 2010 legislation were scheduled to expire on Dec. 31, 2012. If Congress failed to act prior to the end of 2012, the $5.12 million exemption was set to decrease to $1 million beginning Jan. 1, and the tax rate was scheduled to return to a top marginal rate of 55 percent.

As a result of the temporary nature of the legislation, many affluent individuals and families chose the year 2012 to make significant gifts to prevent losing these increased exemptions. In many instances, older generation family members made large gifts into long-term trusts for grandchildren and younger family members, in an attempt to stretch out family wealth over multiple generations. In limited circumstances, families even made gifts in excess of the exemption to take advantage of the decreased top marginal rate for lifetime gifting.

In the end, the American Taxpayer Relief Act of 2012, enacted by Congress on Jan. 2, 2013, made the 2010 estate, gift, and generation-skipping legislation permanent, with a few exceptions. First, the top marginal rate was increased from 35 to 40 percent. Second, the exemption was indexed for inflation and is currently $5.25 million. In addition, the annual gift tax exclusion is $14,000.

In the short term, this new legislation has caused many individuals and couples who decided to forgo making gifts in 2012 to breathe a sigh of relief. However, while portability and an increased exemption seem to have decreased the need for sophisticated federal estate tax planning, the regime itself remains complex and its rules and provisions are highly technical. In addition, it is essential to understand that a few states, including Connecticut, have standalone estate and gift tax regimes.

Some states have exemptions that are significantly less than the federal exemption, and may not recognize portability between spouses. And while portability may be viewed by some as a positive development in tax planning between spouses, there are many common situations that warrant the use of marital trusts and other estate planning arrangements for non-tax reasons.

While the 2012 federal estate and gift tax legislation has brought some permanency to a historically unstable regime, individuals and families still have a lot to consider, and proper tax and estate planning remains paramount in the current landscape.

Shelby L. Wilson is a partner with the law firm of Berchem, Moses & Devlin P.C. in Westport, Conn. She represents clients in the areas of estate planning, estate administration and tax law. Berchem, Moses & Devlin is a multispecialty law practice with offices in Milford and Westport. For more information, visit bmdlaw.com.

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