While Congress wasn’t able to come to terms and avoid the dreaded “fiscal cliff” before the ball dropped, at least they did finally hammer out something. Regardless of where your politics lie and whether you agree with the deal or not—it’s important to know what the new American Taxpayer Relief Act (“ATRA”) says and how it affects your current estate plan.
What’s the Same:
Estate taxes, gift taxes, and generation-skipping transfer (GST) taxes remain 3 peas in a pod with the same basic exclusion amount, just adjusted for inflation, for 2013 now reaching $5.25 million.
The marital deduction also remains the same and the tax on a decedent spouse’s estate is still delayed until after the surviving spouse’s death. ATRA also made “portability” of the marital deduction permanent allowing a surviving spouse to use any of the decedent spouse’s own exclusion amount. This means spouses can now transfer up to $10.24 million to their loved ones free and clear of estate taxes and most Americans won’t owe any federal estate tax upon their deaths.
ATRA did not reinstate the former pick up tax for state estate taxes and Massachusetts estate tax law remains the same with a $1 million dollar threshold for filing an estate tax return and a tax between .8 & 16% on the full amount for those with estates over $1M. Hint: life insurance and retirement count toward your total “taxable estate.”
After you’ve transferred up to the unified exclusion amount for gift, estate, and GST taxes, the top marginal tax rate is now 40 percent, up from 35 percent, still 10 percentage points shy of its 1986 rate of 50%. For a more comprehensive review of the history of the estate tax by the IRS, see: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf
Will Your Plan Still Work?
While ATRA bought some time, the debt ceiling debates in Washington continue and more change could result from a possible default, including adjustments to the gift and estate taxes.
If it’s been more than a year since you created your estate plan, now’s the time to review it for current effectiveness. If you’re considering making gifts, talk with your financial advisor, CPA, and attorney first.
If you don’t yet have an estate plan and think you don’t need one because you don’t have an “estate”, think again! There are many other reasons why everyone should have at least a very basic estate plan with a health care proxy and other medical directives including a living will, a financial power of attorney, and a Last Will and Testament in place.