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ATRA and Your Estate Planning Efforts

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As you may know, when the American Taxpayer Relief Act of 2012 was passed and put into law, it immediately made permanent several estate and gift tax provisions. It also provided a more definitive rule for transfer tax rates and exemption amounts. These were put in place in a way that would allow them to kick in this year.

ATRA

For more than a decade, there was no small degree of confusion about a number of compliance issues for transfer tax rates and exemptions.

The new law remedies most – though not all- of these problematic issues.

Among them:

  • It makes specific transfer tax and income provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
  • It also acknowledges and makes permanent income tax provisions in the Jobs and Growth Tax Relief Reconciliation Act of 2003.
  • Puts into place certain transfer tax provisions as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, or as it’s known -2010 Tax Act.

As far as gift taxes go, the new law shifted and basically “reset” the tax rate schedule to better coincide with estate tax rate schedules with a maximum rate of 40 percent. Before the law was enacted, the exemption amounts for both the gift and the estate tax was the same.

After EGTRRA, we saw the estate tax exemption amount consistently rise even as the gift tax exemption amount remained at $1 million. As a temporary fix, the 2010 Tax Act remedied the differences in the tax exemption amounts. Now, though, ATRA ensures it’s a permanent fix, along with the now-permanent $5 million gift tax exemption. Note, too, it’s indexed annually for inflation and is $5.25 million for 2013.

Estate Tax

Remember, ATRA sets the top estate tax rate at 40% with lower rates that are applicable for those estates less than $1 million; however, it’s important to note that the lower rates present a bit of a domino effect in that the lower rates will kick in a different calculation method that takes into account only the estate tax only for an estate in excess of the estate tax exemption amount. It also allows a surviving spouse to take advantage of any unused tax exemptions by making them permanent.

Generation-Skipping Transfer (GST) Tax

Finally, we take a look at the generation skipping transfer tax. It applies the highest tax rate – which is 40 percent. The exemption amount mirrors the estate tax exemption amount, which as we know, is $5.25 million for 2013. What the law does do is repeal the so-called sunset provisions in EGTRAA by making some of those tax provisions permanent. A few of those include an automatic allocation of GST exemption for indirect skips and trust severances for GST tax purposes.

It’s understandable that despite the changes in the laws, it can all become a bit overwhelming. That’s just one reason why finding a qualified estate planning lawyer can ensure your bases are covered with no vulnerabilities. He can also keep a close eye on any changes in the law that could better benefit you and your family in the long run.

Remember, the IRS continues to target family limited partnerships, or FLPs so those dynamics could shift in the near future as well. Don’t risk missing out on any opportunities to benefit from the changes when it’s possible and certainly you don’t want to move forward believing you’re in compliance, only later learning you’ve been hit with penalties.

Stephen Unsworth
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