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2013 ESTATE AND GIFT TAX UPDATE

As part of our firm’s ongoing commitment to notify our clients of pertinent changes in the law, we want to explain how recent federal legislation may impact your estate plan.

On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (“ATRA”). Congress finally created a permanent estate and gift tax system with no expirations or sunset provisions. The most significant estate and gift tax provisions of ATRA are as follows:

In addition, the annual gift tax exclusion has increased from $13,000 to $14,000 per person per calendar year.

Despite higher exemptions and increased flexibility, proper estate planning remains essential. Coordinating the new federal law with State law creates opportunities for tax savings. Furthermore, portability is not automatic. The Personal Representative of the estate of the first spouse to die must transfer the unused exemption amount to the surviving spouse, who can then use it to make lifetime gifts or pass assets through his or her estate. This transfer necessitates the filing of a federal estate tax return when the first spouse dies, even if no estate tax is owed. Therefore, it is imperative to seek legal counsel even for estates that do not exceed $5,000,000.

We suggest that you call our office to discuss the impact upon your estate plan of the recent changes in the federal tax laws.

 
 

2009 ESTATE TAX UPDATE

As part of our firm’s ongoing commitment to notify our clients of changes in the tax laws, we want to explain how Congressional inaction in 2009 impacts federal transfer taxes.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (the “Act”) which gradually reduced the maximum estate and generation skipping transfer tax rate from 55% in 2001 to 45% in 2009 while increasing the exemption amount from $1,000,000 to $3,500,000. As part of the Act the estate and generation skipping transfer taxes were scheduled to be repealed in 2010, but only for one year. Barring Congressional action, the estate tax and generation skipping transfer tax are scheduled to return in 2011 at the maximum rate of 55% with an exemption of $1,000,000.

Since 2001, there was an expectation among estate planning attorneys that Congress would enact new legislation prior to the expiration of the estate and generation skipping transfer taxes in 2010. The anticipation was that Congress would permanently extend the 2009 exemption amount of $3,500,000 and rate of 45%. However, Congress failed to enact transfer tax legislation prior to December 31, 2009. Therefore, there currently is no federal estate tax and no generation skipping transfer tax.

Does this mean that in 2010 you can transfer wealth without any consequences? The answer is no. There are still federal gift taxes. The annual gift tax exclusion amount is still $13,000 per person per calendar year and lifetime exemption amount is still $1,000,000. There are still Maryland estate taxes because the Maryland estate tax on estates over $1,000,000 is not affected by changes in federal tax law. Furthermore, with respect to federal taxes, we anticipate that one of two things will happen. First, Congress may retroactively enact an estate and/or a generation skipping transfer tax for 2010. While such retroactive legislation could be challenged on constitutional grounds, it may pass constitutional muster. Second, Congress may do nothing in 2010. There won’t be an estate or generation skipping transfer tax in 2010, but on January 1, 2011 the estate and generation skipping transfer taxes would return at the maximum rate of 55% with an exemption of $1,000,000.

Without new legislation for 2010, there will be a much more encompassing capital gains tax on inherited property that is later sold. Under the former transfer tax laws, inherited assets received a step-up in basis to the fair market value at date of death (or the six month alternate valuation date). Capital gains taxes were only assessed on the increase in value, if any, from the date of death (or from six months after the date of death) to the date of sale by the beneficiary. Under current law, in 2010 inherited assets will receive only a limited step-up in basis. Complicated rules have been developed to determine the basis of assets inherited from individuals who die in 2010. Due to this limited step-up in basis, the sale of inherited assets that have appreciated significantly over the decedent’s lifetime are more likely to be subject to capital gains taxes.

It is impossible to predict what Congress will or will not do with respect to transfer tax laws. We suggest that you call our office to schedule an appointment to discuss whether the changes in the federal tax laws impact your current estate plan. We will keep you apprised of developments in the tax laws as they occur.