After the Fiscal Cliff: What’s New for 2013?

The new year began with some political drama and last minute (actually after the last minute) activity to avoid sending the country over the “Fiscal Cliff.” A host of provisions and automatic spending cuts took effect at the stroke of midnight on December 31, 2012. The American Taxpayer Relief Act of 2012 The American Taxpayer Relief Act of 2012 (ATRA) permanently extends a number of major tax provisions and temporarily extends many others. ATRA makes permanent the $5 million exemption amounts (indexed for inflations) for the estate tax, gift tax and the generation-skipping transfer tax – the same as they were in place for 2011 and 2012. The 2013 figure adjusted for inflation is $5,250,000 per person of $10,500,000 per couple. The top estate tax rate was increased from 35% up to 40%.
ATRA also permanently extends the “portability” provision in effect for 2011 and 2012 that allows the executor of a deceased individual’s estate to transfer any unused exemption amount to the individual’s surviving spouse.
While many of the provisions in ATRA are identified as “permanent,” budget decisions are never permanent. Even knowing change can occur at any time, this is the most permanent planning environment we have seen in the last 10-15 years.
The new legislation did not change the prior laws that stated that spouses do not have to pay estate tax when they inherit from the other spouse. When the first spouse dies, the surviving spouse can inherit the entire estate and any estate tax that would be due would be postponed until the second spouse dies. This is not automatic but must be elected in order to take advantage of the benefit. Also, if the surviving spouse is not a U.S. citizen, there are restrictions on how much can be passed to surviving spouse estate tax free.
The current exclusion of $5,250,000 per individual is an exclusion for lifetime gifts and gifts at death. This is often referred to as the “Unified Credit.” Only if an individual transfers more than $5,250,000 would the estate owe an estate tax of 40%. As always, the donor should report any gifts made during lifetime so that a proper calculation can be made. As before, annual gifts of $14,000 or less are not included in the donor’s lifetime calculation (annual exclusion gifts). This figure is also indexed for inflation, up from $13,000 from the last several years. Couples can double this amount for a combined total of $28,000 per person, per year. Medical and tuition gifts also do not count towards the $5,250,000 exemption if paid directly to the institution. It is important to remember that any gift will cause a penalty for Medicaid purposes even if the gift is allowable under the federal gift tax rules. Individuals often believe that because they can transfer $14,000 per person per year under the tax rules, the same rule applies to Medicaid but it does not. The rules for Medicaid are very different than for tax purposes and a penalty will apply if a gift is made.
As an estate planner, we have been telling clients for decades that once the scheduled changes took place, we would need to revisit their plan to ensure it still does what the clients wants it to do. Now the changes are resolved and are as permanent as they could be at this moment.