Federal Estate and Income Tax Law Changes

Federal Estate and Income Tax Law Changes

There are significant changes to the federal estate tax and income tax laws which are part of the American Taxpayer Relief Act of 2012.

Over the last few years, the federal estate exemption level was raised, and for a year (2010) there was no federal estate tax.  It was set to revert to the $1,000,000 exemption level in 2011, until the limit passed by the Congress in late 2010 was raised to $5,000,000, to expire at the end of 2012.

The American Taxpayer Relief Act of 2012 established the permanent exemption amount of $5,000,000, subject to an increase for inflation.  The limit for 2012 was $5.12 million, and it is likely going to be $5.25 million for 2013.

If the exemption level had reverted to the pre-2012 level, the rate would have been 55% over the exempt limit. The new law establishes the rate of 40% on assets in estates over the exempt level.

Under the new law, the exemption may be used during one’s life to make federal estate tax-free lifetime gifts, or at one’s death.

Finally, other estate, gift and generation-skipping tax provisions, including portability, remain in place from 2012.

These changes present excellent planning opportunities for families with assets of $1,000,000 and above that they did not have before.

These changes improve the chances that small companies which have accumulated a fair amount of value do not have to be sold now just to pay the taxes. Prior to this, the law provided a series of complicated credits and incentives that helped to prevent an ongoing company from being sold to pay the taxes, but it was not very satisfactory.  To gain the significant tax credits the company had to continue to operate for ten years. Now companies can be sold and closed out and not be required to operate for another ten years.

In addition, many individuals would like to transfer more property during their lifetime so their heirs can enjoy the use of the assets, but a gift tax exemption of a much lower limit hampered that.  Also, many individuals would prefer to give assets away so that any ongoing gain (and taxes) goes to the heir, or the trust set up for the heir. A $5,000,000 unified credit (for gift and estate transfers) allows much more of this.

What do you do if you have estate planning documents which were written to deal with very different tax laws?  Generally, it means you can simplify your documents.

Instead of complicated trusts in your will (called by-pass trusts, credit shelter trusts, and a variety of other not-so-user-friendly names), you may likely set up a simpler will.  You may decide to include a trust that comes into existence after your death, but only if there is a tax problem and you choose for it to come into effect (disclaimer trust).  If the surviving spouse does not wish to trigger the trust, the estate is much simpler.

This information provided in this blog entry is general in nature and it should not be considered legal advice.  Consult your professional advisors, including your accountant or cpa, to discuss the recent changes in the law.  No attorney-client privilege is created by the publishing of this information.

Mike Wells is an attorney in Winston-Salem, North Carolina, and a partner with Wells Jenkins Lucas & Jenkins.  He has  practiced law in North Carolina for over thirty-five years.  For more information consult his profile information on www.wellsjenkins.com.