As 2012 was winding down, estate planners throughout the country waited to see how Congress and the President would handle capital gains, estate and gift tax issues.

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.

Posted by Attorney Colleen Sinclair Prosser on behalf of the American Academy of Estate Planning Attorneys

In case you haven’t heard, the New Year brought a new law recently signed by the President. To avoid the country from falling off the “fiscal cliff,” the “American Taxpayer Relief Act” was approved on New Year’s Day. The approval and signing of this new law may affect the future of your estate plan and your estate taxes.

Regarding federal estate taxes, this new law makes almost all of the previous tax provisions, commonly known as ”TRA 2010,” permanent, with the exception of the tax rate. This means there is an estate tax exclusion of $5 million that will be adjusted for inflation. So for 2013, the exclusion is $5.25 million. The permanent provisions are combined with the gift tax and can be used either after death or while the person is still alive. The tax rate is now capped at 40% instead of the prior 35%.

The “portability” provision from TRA 2010 is also retained. This means that the estate tax exclusion amount of the first spouse to die may be used by their surviving spouse, assuming an estate tax return is filed for the pre-deceasing spouse.

Regarding state estate taxes, as with the prior law, they remain deductible rather than a credit (as was the case many years ago).

The Generation Skipping Tax (GST) exemption is set at $5 million and is also adjusted for inflation. As in the prior law, the GST exemption is not portable. There are, however, special trusts that can preserve the GST exemption of the first spouse to die.

The new law affects everyone’s income taxes. The existing rates on incomes below $400,000 (single) and $450,000 (married, filing joint) have been set permanently to the current level. For incomes over that amount, the rate will increase from 35% to 39.6%, where it was before 2001. In addition, this income bracket will see a raise in qualified dividend and capital gain income tax rates from 15% to 20%. Those tax rates will not change for lower income amounts.

When it comes to “charitable rollover” IRAs, those provisions will be extended for 2012 and 2013 only. This means that an individual over age 70 ½ can give up to $100,000 from their IRA without taking that amount into income. If you are planning to make or have made charitable contributions from your IRA, this is good to know because the deduction for a normal contribution, without the benefit of a “charitable rollover,” may be capped or not offset the income.

On the spending side, what are commonly known as “sequestration cuts,” which were to start on January 1, have now been delayed for two months. All of these issues will have to be addressed again. So what is slated as “permanent” under this Act may not end up being as permanent as we have been told.

Where does that leave us today? Before you change your existing estate plan, create a new plan or gift to someone, it is important to consult with an experienced estate planning attorney and tax professional who is familiar with these changes and who can show you what will be in your best interest, legally and financially. They will make recommendations about any changes you may need to make to your estate plan now and advise you on what may need to be changed or updated in the future.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

    “2013 Estate, Gift and Capital Gains Tax Changes” by Attorney Colleen Sinclair Prosser

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

The presentation establishes the necessary components of an effective estate plan. The seminar is presented in a case study format profiling the life of Bill and Mary Jones. Several scenarios are used to relay the impact of estate planning issues relating to probate, disability due to incompetence, protection of government benefits for special needs loved ones, second marriages, unmarried couples, minimization of federal estate tax and preserving the family legacy. Wills, living trusts, powers of attorney and health care directives are all represented in the presentation, as well as long term care and Medicaid planning. At its conclusion, the audience will have a clear understanding of their estate planning options and be equipped to make the choices needed for themselves and their loved ones. You won’t want to miss this seminar – it’s informative and easy-to-understand!

TO RESERVE YOUR SEATS AND FOR DATES, TIME AND LOCATION VISIT http://www.sinclairprosserlaw.com/local/estate-planning-seminars.aspx

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

Everyday I meet with families and we discuss the estate planning technique of gifting, which can be a valuable strategy to reduce estate taxes.  Gifting can be done on a limited basis or it can be done on a continuous basis as part of an overall plan to reduce estate taxes.  Either way it can be relatively easy.

Most people have heard that you can give away $13,000 per year per person, but  what most people do not realize is that you can give away more than $13,000.  The rule is that if you give away more that $13,000, then  you have to report the gift to the IRS on  Form 709 which is also known as a gift tax return.

When you file the gift tax return, the portion of the gift in excess of $13,000 reduces your Federal lifetime exclusion amount by that excess.  Currently the Federal lifetime exclusion amount is $5,120,000.  (The Federal lifetime exclusion amount is scheduled to be reduced to $1,000,000 on January 1, 2013.)  Right now, no tax is paid until you gift over $5,120,000 during your lifetime.  That means if you give away $133,000, let’s say to your daughter, the $13,000 is exempt from gift and estate taxes and your lifetime exclusion amount is reduced by $120,000.  Then, at the time of your death, when a Federal estate tax return is filed the $120,000 is brought back into your estate to calculate your Federal Estate tax.

While Maryland does not have a gift tax, it does have an Estate tax that needs to be considered.  The Maryland estate tax exemption is $1,000,000.  Since lifetime gifts are not brought back into the estate at the time of death, if you give away $1,000,000 during your lifetime, at your death you will still have an exemption from Maryland estate taxes of $1,000,000.  Gifting $1,000,000 during your lifetime avoids approximately $160,000 in Maryland estate taxes.

Another misconception about gifting is that a receiver of a gift has to report the gift on their income tax return.  Gifts are not income.  However, if you give capital assets such as real estate, stock or a business, the receiver of the capital asset may have to pay a capital gains tax when the asset is sold.  As an example, you have stock worth $13,000 with a basis of $3,000 and you give the stock to your son.  He sells the stock the day after you give it to him.  The gift is exempt from gift taxes, but upon the sale of the stock your son will have to pay a capital gains tax on the difference between the sales price and the basis.

Knowing what assets to gift is the key.  Gifted assets get a carry over basis so the best asset to give away is an asset without a capital gain, such as cash.  However, if you want to reduce your estate and you do not have liquid assets such as cash, you will want to meet with an accountant or an attorney to discuss the various taxes involved in gifting capital assets like stock, businesses or real estate.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

“The Ins and Outs of Gifting” by Attorney Colleen Sinclair Prosser

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

Don’t forget to tune in today to WNAV Radio on 1430 AM or 99.9 FM @ 3:50 pm to listen to “Your Estate Matters” with Attorney Colleen Sinclair Prosser. The topic is “The Ins and Outs of Gifting”.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

Don’t forget to tune in today to WNAV Radio on 1430 AM or 99.9 FM @ 3:50 pm to listen to “Your Estate Matters” with Attorney Paula M. Mattson-Sarli.  The topic is “How to fund your living trust and why it’s important to do so”.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.

By: Stephen C. Hartnett, J.D., LL.M., Associate Director of Education, American Academy of Estate Planning Attorneys

After much wrangling and politics, on December 17^th, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, otherwise known as “TRA 2010.” The law did many things:

• Temporarily extended the Bush-era income tax cuts,
• Temporarily extended the program extending unemployment insurance benefits,
• Temporarily cut employee’s FICA tax by 2%, and
• Temporarily provided estate tax relief.

From an estate planning perspective, the new law set the amount that could pass without an estate tax at $5 million per person for 2010-2012. However, the new law is temporary and will expire after 2012. In 2013, the amount that can be passed free from tax will go back down to $1 million per person. Thus, unless the law is changed again between now and then, someone dying in 2013 would only be able to pass $1 million without an estate tax.

As before, you can use a portion of that exclusion to make lifetime gifts, but then it would not be available at death. In 2010, you can use up to $1 million of your exclusion during your lifetime. In 2011 and 2012, you can use your whole $5 million exclusion during life. Of course, then you would not have any available at death.

Congress also introduced a new “portability” provision. This is where one spouse can add their deceased spouse’s remaining estate tax exclusion to their own exclusion to shelter more from taxes. This portability provision, also known as the “Deceased Spousal Unused Exclusion Amount,” can be used to shelter the assets of the surviving spouse. While intriguing on the surface, under current law this portability tax benefit only happens if both spouses die in 2011 or 2012. If either spouse hangs on until 2013 or beyond, there is no portability option available.

In addition, the new law reduces the top estate and gift tax rate to 35% in 2010-2012. However, a top rate of 55% returns in 2013 and thereafter.

So, what’s the gist of the new law? Prior to TRA 2010 we were facing a return to the $1 million estate tax exclusion on January 1, 2011. Now, we are still facing a return to the $1 million estate tax exclusion; it’s just put off for two years now—to January 1, 2013. The bottom line is that TRA 2010 is temporary. In two years, it will disappear as though it had never existed.

SinclairProsser Law, LLC is a member of the American Academy of Estate Planning Attorneys.