At 2:00 a.m. on January 1, 2013 (after the nation had technically gone over the “fiscal cliff”), the Senate passed the American Taxpayer Relief Act of 2012 (the “Act”). Just before midnight on that same day the House of Representatives also passed the Act, which was then signed by the President on January 2, 2013.The Act averted many of the tax hikes and exemption reductions which were scheduled to go into effect in 2013. On the estate planning wealth transfer side, this piece of last minute legislation prevented the scheduled reduction of the estate and gift tax exemption to $1 million and the scheduled increase of the top estate, gift and GST tax bracket to 55%.
Highlights of the estate, gift and GST tax provisions of the Act can be summarized as follows:
- Exemption. The $5 million exemption (indexed to inflation since 2011) for estate, gift and GST taxes is now made permanent. The inflation-adjusted exemption for 2013 is expected to be $5,250,000, although that number is not yet official. Clients who did not use all of their gift and GST exemption in 2012 still have the opportunity to do so in this or future years. In addition, as a result of the inflation index, clients can expect to acquire additional gift and GST exemptions each year that they may wish to utilize.
- Tax Rate. Effective January 1, 2013, the maximum estate, gift and GST tax rate for transfers in excess of the inflation-adjusted $5 million exemption is 40%. That rate is higher than the 35% rate in effect from 2010-2012, but is lower than the 55%rate which would have applied if no Act had been passed and lower than the 45% rate proposed by the Administration.
- Portability. The Act makes “portability” of exemptions between spouses permanent. Portability is a feature added by the 2010 Tax Act which, in its simplest terms, allows the estate of the first spouse to die to transfer his or her unused estate and gift tax exemption (but not GST tax exemption) to the surviving spouse. The effect of portability (although certain restrictions apply) is to allow a couple to transfer an inflation adjusted total of $10million in assets free from any estate or gift taxes.
- IRA Charitable Rollover. The Act reinstates for calendar year 2013 the ability of taxpayers over the age of 70½ to make distributions of up to $100,000 from an IRA directly to qualified public charities and exclude the distribution from their income. The Act also includes two transition rules to allow donors to make 2012 charitable contributions from an IRA: (a) first, if an individual over the age of 70½ took an IRA withdrawal in December 2012, that individual may elect to treat up to $100,000 of that withdrawal as an income tax-free direct payment to charity to the extent he or she makes an equivalent cash contribution to a public charity by January 31, 2013; and (b) second, during the month of January, 2013, an individual over the age of 70½ may make a direct distribution of up to $100,000 from an IRA to a qualified public charity and elect to have that distribution treated as a 2012 qualified charitable distribution. This later provision is of particular benefit to donors who want to take advantage of the IRA Charitable Rollover in both 2012 and 2013.
- Annual Exclusion Gifts. Although it was not a part of the Act, the gift tax annual exclusion has increased from $13,000 to $14,000 in 2013 under the normal indexing provisions of the Internal Revenue Code. Clients are encouraged to take advantage of annual exclusion gifts early in calendar year 2013.
The Act directs that the tax provisions outlined above are “permanent”. Obviously, that is welcome news for clients (and their advisors) who have endured “temporary” tax measures for the last 12 years. However, tax laws are only permanent until Congress decides to change them.