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Three Things in Life are (or were) Certain: Estate planning after the American Taxpayer Relief Act of 2012
Posted in Estate Planning

It is commonly said that two things in life are certain: death and taxes. When thinking about “death taxes” prior to the enactment of the American Taxpayer Relief Act of 2012, though, a third certainty in life seemed to be that federal gift and estate tax laws would change (almost) every year. However, the passage of the Act has changed that.

Estate planning before the American Taxpayer Relief Act of 2012

Under former law, the amount of estate tax that would be owed by a decedent’s estate could differ significantly, depending upon a difference of a year or two in the date of death. This variation was due solely to the year-to-year changes in the estate tax exemption. For example, the estate tax exemption was $2 million in 2008, $3.5 million in 2009, and $5 million in 2011. Furthermore, prior gift and estate tax laws had expiration dates. The $5 million exemption that applied in 2011 was scheduled to expire on Dec. 31, 2012, to be replaced with only a $1 million exemption.

Before enactment of the Act, clients and their advisors were forced to consider alternative planning scenarios based on varying estate tax exemption amounts and assumptions as to whether or not the then-current law would actually expire as scheduled. This uncertainty as to the rules which would apply at death made planning very difficult.

Estate planning after the American Taxpayer Relief Act of 2012

The Act changes, at least in part, the third “certainty” of uncertainty referenced above with respect to death taxes. The federal gift and estate tax exemption amount will no longer change from year to year. The Act sets the federal gift, estate and generation-skipping transfer tax exemption amounts at $5 million, indexed for inflation – and with no expiration date. With inflation adjustments, these exemptions are $5.25 million in 2013. The Act also enacts a “portability” election, which may allow a surviving spouse to utilize the unused estate tax exemption of his or her predeceased spouse.

Estate plans should be reviewed in light of these changes. An estate plan completed in 2008, when the estate tax exemption was $2 million, may no longer make sense or properly effectuate a client’s intentions after the Act. Life insurance should be reviewed to ascertain the planning impact of the Act on the amount of the life insurance and on the ownership of such life insurance.

Portability under the American Taxpayer Relief Act of 2012

For years, clients have been advised to keep certain assets titled in the individual names of the husband and wife (and not titled in their joint names, with rights of survivorship), in order to utilize the estate tax exemption at the first to die of the husband and wife. With the new portability provisions of the Act, such separate titling may no longer be necessary in order to avoid federal estate taxes. In fact, a client’s desires might be better achieved by titling assets jointly with his or her spouse. Keeping assets titled in the individual names of the husband and wife might cause a probate proceeding to be needed in the estate of the first to die, unless revocable trust ownership is used. A probate proceeding might easily be avoided by titling assets in joint names.

On the other hand, some clients will be better served to keep certain assets titled in individual names in order to, for example, “protect” such assets in trust for the benefit of children and grandchildren. Furthermore, having assets titled in the decedent’s individual name may allow all appreciation on such assets to escape further estate taxation. Even clients who have gifted away their entire gift tax exemption may want to keep some assets titled in their individual names in order to utilize the inflation adjustment increases to the gift/estate tax exemption that would be available at death.

Trust funds under the American Taxpayer Relief Act of 2012

Popular planning techniques in 2011 and 2012 included the creation and funding of various types of trusts – spousal lifetime access trusts, gift trusts for children and/or grandchildren, asset protection trusts, grantor retained annuity trusts and charitable lead annuity trusts. Such planning techniques allow appreciation to be removed from the grantor’s estate, and each technique also has its own special purposes or benefits.  Such techniques should still be attractive in 2013, and an added motivation in 2013 will be to take steps to reduce income taxes. Income tax rates for 2013 have increased.  A gift trust for children and/or grandchildren may help reduce the overall income tax liability of a family because the income from such a trust could be sprinkled among various family members who are in different income tax brackets, reducing the overall income tax liability of the family. Grantor retained annuity trusts and charitable lead annuity trusts continue to be good planning tools in this low-interest-rate environment.

What about state death taxes?

Indiana enacted legislation to repeal the Indiana Inheritance Tax in stages, over a ten-year period, beginning in 2013. It is possible that the Indiana Legislature will enact further legislation that will accelerate repeal of the Indiana Inheritance Tax (current legislation is being considered to repeal the tax by 2018). Clients who are Indiana residents, or who have real or tangible personal property located in Indiana, should have their estate plans reviewed in order to assess the impact of the Indiana Inheritance Tax repeal on their plans.

Taking advantage of the American Taxpayer Relief Act of 2012 now

Even if the new higher federal gift, estate and generation-skipping transfer tax exemptions are now in fact “permanent,” it seems likely that additional laws affecting federal death taxes will be enacted and will change from time to time. For example, there is sentiment to reduce or eliminate some of the estate planning benefits of family limited partnerships (or family limited liability companies), grantor retained annuity trusts, dynasty trusts and grantor trusts. Prompt planning is needed in order to still take advantage of these planning techniques.

For more information, or to have your estate plan reviewed, please contact a member of the Estate Planning Practice Group at Bingham Greenebaum Doll LLP.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

  • Partner

    Greg works with estate and wealth transfer and matrimonial law in the firm's Estate Planning Department and is also part of the Corporate Services Department. Among the legal services he provides for his clients are estate and gift ...

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