At the beginning of January 2013, the American Taxpayer Relief Act was signed. The new law outlined changes regarding gift taxes, federal estate taxes and generation-skipping transfer taxes. However, there was one highlighted exception.
Some of the changes include less favorable tax rates, but the gift tax, estate tax and generation-skipping transfer exemptions are more favorable. The federal estate tax exemption increased to $5.12 million in 2012 due to being indexed for inflation. For 2014, the federal estate tax exemption increased to $5.34 million. Estate tax rates for those valued higher than this increased from 35 percent in 2012 to 40 percent in 2013. The lifetime gift tax was the same as the estate tax exemption and increased equally. For 2014, $14,000 is the annual exclusion from gift taxes.
The portability of federal estate tax exemptions for married couples was made permanent for 2014. During and prior to 2009, they had to pass as much as two times the federal exemption using AB trusts. The need for trust planning was eliminated in 2010 when portability was added. Since this provision is now permanent, couples can pass as much as $10.68 million to heirs without federal tax penalties and without planning. However, even if the deceased’s estate is not taxable, the surviving spouse will have to file a Form 706 from the Internal Revenue Service to take advantage of this. If this form is not filed, the unused estate tax exemption is lost.
In 2005, the pick up tax was removed by federal law, and it was not reinstated during the recent changes. This tax was a state estate tax, which was equal to a portion of the federal tax bill. State taxing authorities were responsible for collecting it. If state laws returned to the way they were in 2001, the pick up tax would have resurfaced in 2013, and that would have meant that several states would again collect state estate taxes. However, states without freestanding estate taxes remain dormant in this area, and the pick up tax is not expected to reappear in the near future.
For state estate taxes in some places, special planning is required. Hawaii is the only state that made the state estate tax exemption portable for married couples. With states where there is a difference between federal and state tax exemptions, couples must include special planning to use both exemptions. For generation-skipping trusts, special planning is required. As stated before, the estate tax exemption was made portable for couples. It is important to remember that generation-skipping transfer tax exemptions have not been made portable. If couples want to take advantage of both spouses’ transfer tax exemptions, special planning is required. To learn more about exemptions and the new law changes, please call ACBI at 203-259-7580 or visit our website.