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A LOOK AT THE 2013 FEDERAL ESTATE TAX Bradley B Anderson Estate Planning & Elder Law Attorney


The estate tax could have taken the majority of the taxable portion of your estate. ● ●

The estate tax exclusion is still portable after the passing of the American Taxpayer Relief Act of 2012. There were no guarantees regarding the future of portability. ●

At the end of 2012 the news cycles were dominated by talk of an impending plunge over the "fiscal cliff." Falling off this cliff would have resulted in automatic tax increases and spending cuts. Under the laws that existed at the time one of these tax increases would have been an increase in the estate tax rate. Throughout 2012 the maximum rate of the estate tax was 35%, but it was scheduled to rise to as much as 55% in 2013. You may think that there must have been some mistake made in the above sentence, but in fact it is accurate. The estate tax could have taken the majority of the taxable portion of your estate. The estate tax exclusion was also going to change for the worse. Under the terms of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 the exclusion was set at $5 million for 2011. After an adjustment for inflation it was $5.12 million in 2012. After the sunset of this act at the end of 2012 the exclusion was supposed to drop to just $1 million.

The American Taxpayer Relief Act of 2012 At the very end of the year legislators on both sides of the aisle came to a compromise, and the terms of this compromise became the American Taxpayer Relief Act of 2012. This legislative measure spared


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us from the $1 million exclusion and 55% maximum rate. Because of provisions contained within this act the estate tax exclusion is $5.25 million in 2013 after yet another adjustment for inflation. The maximum rate of the tax was hiked from 35% to 40%. There was some concern about the ongoing portability of the estate tax exclusion. In this context the term "portability" defines the right of a surviving spouse to use the exclusion that was afforded to his or her deceased spouse. The tax relief act that was passed back in 2010 made the exclusion portable in 2011 and 2012. There were no guarantees regarding the future of portability. As it turns out the estate tax exclusion is still portable after the passing of the American Taxpayer Relief Act of 2012. So, if you were to

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predecease your spouse he or she would be able to use your exclusion plus his or her own. This would result in a total exclusion of $10.5 million in 2013.

Gift Tax & Estate Tax Are Unified You may get the idea that you can give gifts to family members while you are still alive in an effort to steer clear of the estate tax. Unfortunately there is a federal gift tax in place, so this is not as simple as it may sound. The federal gift tax carries the same 40% top rate, and the lifetime exclusion is $5.25 million. It is important to understand that this is a unified exclusion. You don't have $5.25 million for gifts and another $5.25 million to apply to your estate. This figure encompasses the combination of gifts that you give that are taxable coupled with the value of your estate. Thus, what you gift during your lifetime reduces the exclusion at your death.


In addition to this $5.25 million unified exclusion there are also some additional gift tax exclusions that you can in fact utilize to gain tax efficiency. One of these is the annual per person exclusion. You can give as much as $14,000 annually to any one individual free of the gift tax. There is no limit to the number of people you can give this amount to, and each taxpayer is entitled to this exclusion. This means that a married couple could give as much as $28,000 to any number of people in a given year free of taxation. These can be direct cash gifts, but this exclusion is also utilized to fund certain types of trusts or to give out shares in family limited partnerships on an annual basis to enable ongoing tax-free asset transfers. There are two other types of gift tax exemptions that we would like to highlight here. You may pay the medical expenses of other

individuals as a gift free of the gift tax. These payments must be made directly to the provider. This medical exemption also extends to the payment of health insurance premiums for someone else. Americans can also pay the school tuition of others without incurring any gift tax liability. Once again, these payments must be made directly to the institutions.

Generation Skipping Transfer Tax Another tax on asset transfers is the generation-skipping transfer tax. This levy has the same 40% top rate and $5.25 million exclusion. It is applied to asset transfers to a family member that is more than


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one generation younger than you or to an individual that you are not related to who is at least 37.5 years younger than you.

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Conclusion: Advance Planning Is Key A 40% levy on your estate can have a very significant impact on the financial future of your family. There are a number of different steps that you could potentially take to arrange for asset transfers in a tax efficient manner. The key is to discuss your situation with a licensed estate planning attorney who has a background assisting high net worth clients. Your lawyer will gain an understanding of your unique personal situation, become apprised of your goals, and recommend the appropriate

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References Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Estate-and-Gift-Taxes Reuters http://www.reuters.com/article/2013/02/26/us-column-feldmanidUSBRE91P0NY20130226


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Helping Families Preserve Their Wealth During and After Their Lifetime Our firm is dedicated to providing you with quality estate planning resources, so you can become familiar with all of the existing options. When you visit or call our office, we want you to feel comfortable discussing such an important issue concerning both you and your family. We want to arm you with the information you need to make an informed decision about your family's future. If you have a well-drafted estate plan in place, you'll ensure that your estate passes to whom you want, when you want, and is carried out in the manner you've chosen. You can rest assured that your family won't have to endure the public process and costly matter of probate. The government won't be able to take what you've spent a lifetime building. But you need to be aware of the many options that exist in estate planning—and you must choose your attorney wisely. That is why Anderson, Dorn & Rader, Ltd. offers this wealth of free information and free seminars. Read our Estate Planning articles, and if you're in the area, join us at an Estate Planning seminar. We want you to feel confident about the choices you make—let us be your guide on the path toward preserving your family's future.

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A Look at the 2013 Federal Estate Tax  

At the end of 2012 the news cycles were dominated by talk of an impending plunge over the "fiscal cliff." Falling off this cliff would have...

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