Under what is called a sunset provision, the estate tax exemption was scheduled to return to $1,000,000 on January 1, 2013, the amount set prior to the Bush Era Tax Cuts. This would have meant that all estates in excess of $1,000,000 would be subject to a Federal estate tax.
According to the bill recently passed by Congress, beginning on January 1, 2013 the estate tax exemption will exceed $5,000,000 with any estate in excess of $5,000,000 subject to a tax of 40% on assets exceeding that amount. The estate tax exemption will be adjusted annually for inflation so each January a new exemption amount will apply. If proper estate planning is done, married couples will be able to pass on to their heirs over $10,000,000 without paying a Federal estate tax.
One powerful tool in estate planning is gifting. Effective January 1, 2013 the annual gift tax exclusion has increased from $13,000 to $14,000. As of now, it appears that the lifetime gift tax limit will continue to follow the estate tax exemption and you will be able to gift in excess of $5,000,000 during your lifetime.
When considering gifts you must also consider how the capital gains tax will apply to gifts. At death capital assets get a “stepped up basis”. This means a new basis is determined for the asset as of the owner’s date of death or possibly six months following the date of death. The new basis is applied to the inheritor of the capital asset. However, assets that are gifted get a carry over basis which means the receiver of the gift uses the basis of the giver. Dividend and capital gains tax rates will increase under the new law from 15% to 20%. For high income families (families earning over $450,000 and single people who earn over $400,000) the rate will include a 3.8% surcharge from the Affordable Care Act. When determining whether to gift assets during your lifetime or hold them until your death, you must do a thorough analysis to determine what the estate tax saving will be and what the capital gains tax will be.
In addition to the Federal law, residents in Maryland must consider the Maryland estate tax which has an exemption of $1,000,000. The Maryland income tax varies from county to county, but is approximately 8% and applies to the sale of capital assets. Maryland does not have a gift tax.
These new changes in the tax laws bring a new set of challenges for our clients as we work together to determine how best to plan their estates to reduce taxes.
SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.