How the New Tax Laws will Affect You - Part II



January 18, 2013


Part II – Estate, Gift, and Generation-Skipping Taxes



The tax side of the “Fiscal Cliff” has been averted.  Additionally, the American Taxpayer Relief Act makes changes to laws affecting estate, gift and generation skipping taxes.  How might these changes affect your estate planning?


In this WEALTHWISE, we discuss these changes starting for 2013.


Where things stand starting in 2013




The estate, lifetime gift, and generation-skipping exemption amounts have been set at $5,250,000.

For example, a person who dies in 2013 with an estate of $6,000,000 will only be subject to tax on $750,000, which is the amount above the exemption.  A person who dies with an estate of $5,250,000 or less will not be subject to any estate tax.


Tax Rates


The estate, gift, and generation-skipping tax rate is now 40%. 


In the example above, the estate tax would be $300,000 given that only $750,000 is subject to tax.


Annual Gift Tax Exclusion Amount


The annual gift tax exclusion amount is now $14,000.  This means that you can gift up to $14,000 each year to any individual without triggering the gift tax. A husband and wife can gift up to $28,000 to an individual.  If you have an estate over the $5.25 million exemption, it can be helpful to gift assets during your lifetime to reduce taxes for your heirs.


For example, a couple wants to gift money to their 2 grown children.  They can each gift $14,000 to each child.  The total amount gifted would be $56,000.


Estate Tax “Portability”


The “portability” of the estate tax exemption is now permanent.  This provision allows a surviving spouse to claim any unused portion of their deceased spouse’s estate exemption.  This feature can be helpful to reduce taxes on the estate after the second spouse’s death.


For example, if a spouse dies and his estate only claimed $2 million of the $5.25 million exemption, then the surviving spouse could add $3.25 million to her available exemption.  So she could have a $8.5 million exemption at her death.


Basis of Inherited Assets


Heirs will continue to receive a step-up in cost basis on inherited assets.  This allows heirs to use the fair market value on the date of death as the cost basis for an asset.  This generally reduces the capital gains tax when the heirs sell the asset.


For example, a father owned stock with a cost basis of $10 per share.  When he died, his sons inherited the stock.  The value per share on the date of the father’s death was $25 per share.  Therefore, the sons’ cost basis for that stock is $25 per share, not $10.  If the sons sell the stock for $26 per share, their capital gain is only $1 per share.


State Death Tax Deduction


The Act extends the deduction for state estate taxes. So if you live in a state which levies its own estate taxes, these can be deducted on the federal estate tax return.


More Estate Tax Provisions


The Act extends other provisions on:
• Qualified conservation easements
• Qualified family-owned business interests
• Installment payment of estate tax for closely-held businesses
• Repealing the five percent surtax on estates larger than $10 million


The next step


Even though the above changes may not affect you immediately, it is wise for financially successful households to review their existing estate plan in light of these tax changes. At PARTNERSINWEALTH, our PERSONALCFOs coordinate with estate planning attorneys and other advisors to create customized plans to mitigate the impact of the tax increases on a family’s estate.


If you would like to learn more about how PARTNERSINWEALTH can help with estate tax strategies, please contact your PERSONALCFO or Jim Waters at 713.964.4028.


The next WEALTHWISE will discuss taxes related to the Patient Protection and Affordable Care Act which become effective in 2013.