Estate Planning: Where Are We Now?

The American Tax Relief Act of 2012 (ATRA), signed into law on January 1, 2013, preserved many Bush-era tax cuts that had been previously extended for two years at the end of 2010. One area that was favorably affected was the gift, estate and generation-skipping transfer (GST) tax regime. ATRA maintained a $5,000,000 exclusion for all three taxes and indexed the exclusion for inflation. Re-unification of the exclusion at $5,000,000 (indexed) brings unprecedented opportunities to gift assets and transfer wealth.


Exclusions and Rates: For 2013, this exclusion, referred to as the “basic exclusion amount,” is $5,250,000 and the top tax rate on transfers in excess of the basic exclusion amount was increased from 35% to 40%. In addition to the basic exclusion from estate tax at death, annual exclusion gifts, indexed for inflation, are still available for lifetime gifts of a present interest (one in which the donee has all immediate rights to the use, possession and enjoyment of the property and income from the property). The annual exclusion for 2013 is $14,000. Annual exclusion gifts to grandchildren, if properly structured, will also not be subject to GST. In addition, if you directly pay for someone else’s education or medical bills, you need not be concerned with any potential gift tax consequences. Gifts which qualify as transfers for education or medical expenses will not use up your annual exclusion or your basic exclusion. Because no dollar limits exist on qualified educational or medical expense transfers, this can be an effective and relatively easy estate reduction tool.


Portability: ATRA made permanent the concept of portability, which was first introduced in 2010, initially applying only to the estates of decedents who died in 2011 and 2012. Now applicable to all estates created in 2013 or later, this provision permits the estate of the first spouse to die (“the deceased spouse”) to elect that any unused amount of the deceased spouse’s basic exclusion (“Deceased Spouse’s Unused Exclusion or DSUE”) pass to the surviving spouse. As a result, the amount that the surviving spouse can shelter from gift or estate tax is the surviving spouse’s basic exclusion plus any DSUE received from the deceased spouse. Prior to portability, each spouse’s exclusion was a “use it or lose it” proposition. If total spousal assets exceeded the exclusion amount and assets passed entirely from one spouse to the other, the first spouse’s exclusion was wasted and substantially higher taxes were ultimately paid. Keep in mind that portability does not apply to transfers which may be subject to GST tax, so that the amount each person can pass to a grandchild or younger descendant will still be limited to the basic exclusion amount. In order to take advantage of portability, it will be necessary for both spouses to file Federal estate tax returns even for those estates which are below the basic exclusion amount.

Step-Up or Step-Down in Basis: Under ATRA, assets received from a decedent will continue to receive an adjustment in basis (“step up” or “step down”), so that the basis of an inherited asset will be equal to the fair market value of the asset at death (or in certain cases, as of the alternate date of valuation which is either six months after the date of death or earlier if the asset is sold before six months). It is important to note that this “step-up” or “step-down” in basis is not applicable to all types of assets.

State Taxes: Although the Federal basic exclusion is $5,000,000 indexed for inflation ($5,250,000 for 2013), state estate and gift taxes do not necessarily follow these Federal rules. Some states have no estate or gift tax, and others have an estate tax with no gift tax or have different thresholds triggering these taxes. For example, the rules in New York, New Jersey, Connecticut and Pennsylvania all differ from those at the Federal level and from those in other states. Their general rules are:

  • New York – estate tax exclusion of $1,000,000 with a top rate of 16% and no gift tax.
  • New Jersey – estate tax exclusion of $675,000 with a top rate of 16% and no gift tax.
  • Connecticut – estate tax exclusion of $2,000,000 with a top rate of 16% and a gift tax once gifts after 1/1/05 exceed $2,000,000.
  • Pennsylvania – separate inheritance tax with rates that range from 4.5% to 15% depending on the relationship of the beneficiary to the decedent (as only transfers to the surviving spouse are exempt) and no gift tax.


Deductions for state death taxes continue; the qualified family owned business interest deduction and the 5% surcharge on estates exceeding $10 million were repealed; installment payments for qualifying estates with closely held business interests were liberalized; various helpful generation-skipping tax provisions were made permanent; and a provision slightly simplifying the exclusion for conservation easements was made permanent.

ATRA’s provisions will allow for planning in a more certain tax environment. However, several changes that may dramatically limit estate planning could appear in future legislation. The current regulations are only permanent until changed by Congress. Talk to your WeiserMazars advisor to discuss strategies to take advantage of the current planning opportunities for you and your family.


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