Murtha Means More

Federal Gift & Estate Tax Law Changes

February 11, 2013


President Obama and Congress worked their way to the edge of the fiscal cliff and then, not surprisingly, reached an agreement on how to avoid the most immediate fiscal problems before them. As many people had hoped, they also brought some long-term certainty to the federal gift and estate tax landscape. This newsletter will help you understand how the federal gift and estate tax laws have changed. The fiscal cliff settlement also included substantial changes to federal income taxes that are not discussed below.

With some changes, Congress and the President made permanent much of the gift and estate tax system that was in place for 2011 and 2012: the gift and estate tax “exemption” was unified and fixed at an inflation-adjusted $5.25 million per person, meaning a husband and wife with combined personal estates of as much as $10.5 million can avoid all federal estate taxes. The portability to the surviving spouse of the unused portion of the first deceasing spouse’s exemption also was made permanent. For example, if the estate of a deceased person is valued at $2 million, the unused portion of the exemption ($3.25 million) is added to the surviving spouse’s exemption, so that the surviving spouse can gift up to $8.25 million tax free.

The generation skipping transfer (GST) tax exemption also was fixed at $5.25 million and indexed for inflation. The GST exemption, however, is NOT portable, meaning that careful planning remains necessary to protect transfers to grandchildren from estate, gift and GST taxes.

There was, of course, a price to pay for the permanence of these historically high exemptions: the gift and estate tax rate was increased from 35% (for 2011 and 2012) to 40% for 2013 and beyond. When state estate taxes are included, the total tax on taxable estates continues to be approximately 50%. Thoughtful and early planning for large estates is as necessary now as ever before.

The “bottom line” is that those with large taxable estates simply got a tax increase. They can expect that their estates will pay an additional $40,000 in federal taxes for every $1 million in excess of $10 million. Those with smaller estates now have a reasonable degree of certainty that, unless and until Congress and the President decide to change things, their estates will escape all federal estate tax.

Unchanged in all of this is the continued impact of STATE estate taxes. The Massachusetts exemption remains at $1 million, and the Connecticut exemption is $2 million. Couples whose estates exceed $2 million can expect those estates to pay state estate taxes of $100,000 or more. And since the state exemptions are not portable, the tax bite could be worse without careful planning.

Simple Wills for couples exposed to state estate taxes ordinarily will not minimize taxes. Moreover, couples with sufficient wealth to cause worry about estate taxes often decided that their wealth should be held in trust for their children to protect against the possibility of divorce, lawsuits, business failures, bankruptcy and other risks that can deplete inherited wealth unnecessarily.

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