Thursday, November 28, 2013

What the “Fiscal Cliff” Resolution Means for Personal Estate Planning

Fiscal Cliff

At the end of 2012 one of the most popular media and water cooler topics was the so-called "Fiscal Cliff."  The Fiscal Cliff was such a frequent topic of discussion and debate because it referred to the serious financial ramifications that the United States would face if the Budget Control Act of 2011 went into effect on December 31, 2012.  These financial changes would have meant an end to the temporary payroll tax cuts, resulting in a 2% tax increase for employees, the end to several tax breaks for businesses, a change to the alternative minimum tax, a rollback of the "Bush tax cuts", and the beginning of taxes related to the Affordable Care Act. However, mere hours before midnight on December 31st, a deal was struck to avoid a financial crisis, and President Obama signed the American Taxpayer Relief Act of 2012 (the "Act").  Among other things this resolution impacted taxes related testamentary and inter vivos gift-giving that may impact estate planning for some.  

Annual Exclusion from Gift Tax
Under the new law for 2013 the annual exclusion from gift tax increased from $13,000 to $14,000 per recipient per year.  Under this rule a married couple can combine the exclusion and give each recipient $28,000 per year without being hit with a gift tax.  A Raleigh estate planning attorney gives the following example of how a family could apply the gift tax rule when estate planning.  A married couple could give the family of their married child who has a two children a total of $112,000.  The child could receive $28,000, the child's spouse could also receive $28,000, and each of their two grandchildren could receive $28,000.

Generation-Skipping Transfer Tax Law
Originally imposed in 1976, the generation-skipping transfer tax imposes a tax on gifts to beneficiaries who are a generation removed from the testator. It is now only imposed on gifts of over $5 million, and typically applies to gifts to grandchildren.  However, the law also specifies that the tax applies to gifts to recipients who are 37.5 years or more younger than the testator.

Prior to the Act the estate, gift and generation-skipping transfer tax law expired and had to be renewed.  Now Congress has permanently set the exemption amount at $5 million, meaning $10 million for a married couple, adjusted annually for inflation.  For 2013 the amount is $5.25 million.  Gifts in excess of the exemption amount are taxed at a 40% rate.  However, with careful estate planning, wealthy families will be able to avoid or minimize taxes on gifts to children and grandchildren.

Charitable Contributions from IRAs
The IRA charitable contribution rollover rule was first introduced in 2006.  It allows people 70½ and older to make a direct charitable gift of as much as $100,000 per year from their traditional IRAs. However, the provision expired at the end of 2011. As part of the Fiscal Cliff resolution Congress extended this provision through 2013. This option is attractive to people who must take minimum distributions and who also wish to make gifts to their favorite charities.  People who take advantage of this option can make a charitable gift without increasing their adjusted gross income. 

Every year there are changes to the rules that may impact tax planning and estate planning.  What changes would you like Congress to consider that would help make tax planning and estate planning less complicated?


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