The American Taxpayer Relief Act: What it means for estate planning

For years, estate-planning attorneys had the headache of dealing with various legislative changes that constantly altered the disposition of estate inheritances. Fortunately, in early 2013, the American Taxpayer Relief Act was enacted into law. This resulted in major taxation changes, which will probably affect estate planning indefinitely. The Act brings ample clarity for estate taxes and makes estate planning much easier and less dependent on the year someone passes. The major changes create permanency in laws relating to the estate tax exemption, creating solid benefits for beneficiaries, including spouses.

The estate tax exemption

A permanent amount: One of the biggest consequences for a beneficiary of an estate is the tax consequences. After all, receiving a hefty inheritance is technically an accession wealth, meaning the value of a bequest is therefore taxable.

Since 2001, the estate tax exemption has increased from $1 million to more than $5 million. Furthermore, estate tax rates have decreased from 55 percent to 35 percent (and then back up to 40 percent) in this same period. Adding to that, in 2010, the estate tax was entirely eliminated. As one can see, during the past decade, the specific year of a person’s passing was very significant, as there were major differences in tax liability depending on the actual death date.

The capricious and uncertain changes made tax planning difficult. How could someone possibly know the exact year when he or she would die? If a person died in 2003, this was very different from passing in 2010. Just ask George Steinbrenner family, who died in 2010 when there was no federal estate tax. George “took one for the team” one last time. Finally, in 2013, the Taxpayer Relief Act makes these rates and exemption amounts permanent. Now, the current estate tax exemption is $5,250,000 (indexed for inflation) and the federal estate tax rate on any excess is 40 percent.

Spousal benefit: In addition, the Act makes a provision from previous legislation, which permitted a person’s unused exemption to be transferred to a surviving spouse, permanent. Therefore, assuming none of the tax exemption was used by a particular person, if that person’s spouse dies, then the surviving spouse benefits from a total estate and gift tax exemption of $10,500,000 (subject to certain rules if the surviving spouse remarries)

The new act creates direction for estate-planning attorneys. This helps lawyers create estate plans for clients with more conviction. Consequently, this also relieves clients’ fears, as they now know the consequences that will attach to their intended beneficiaries.

Estate planning also concerns State Estate Taxes. New York State only allows an estate tax exemption of $1 million and New Jersey only allows $675,000. The top state estate tax bracket is 16 percent. These state estate taxes can be defeated with death-bed gifts – which can sometimes save considerable tax dollars for beneficiaries even if the Taxpayer procrastinates to the very end.

If you want to create an estate plan and control the disposition of your wealth, contact an experienced estate-planning attorney in your area.