New Laws in Gift Planning

Sue Anderson
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Gift & Estate Tax
The American Taxpayer Relief Act (ATRA) of 2012 prevents steep increases in estate, gift and generation-skipping transfer (GST) taxes that were slated to occur for individuals dying and gifts made after 2012. The Act does this by permanently keeping the exemption level at $5,000,000 as indexed for inflation after 2010 (2013 exemption estimated to $5.25 Million at press time). However, the Act also permanently increases the top estate and gift tax rate from 35% to 40%.

Gift & Estate Exemption Reunification
Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA) reunified the estate and gift taxes. The ATRA permanently extends unification and is effective for gifts made after December 31, 2012.

Portability of Unused Estate Tax Exemption Made Permanent

The TRUIRJCA allowed the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse for estates of decedents dying after December 31, 2010 and before January 1, 2013. The ATRA makes permanent this provision and is effective for estates of decedents dying after December 31, 2012.

CAUTION – A Form 706 (Estate Tax Return) must be timely filed to obtain the portability.

The basic exclusion amount is $5.12 million for deaths in 2012 and $5 million (subject to an inflation adjustment) for individuals dying in 2013. (Code Sec. 2010(c)(3))

The “deceased spousal unused exclusion amount” is the lesser of:

(1) the basic exclusion amount, or

(2) the excess of the applicable exclusion amount of the last deceased spouse dying after Dec. 31, 2010, of the surviving spouse, over the amount on which the tentative tax on the estate of the deceased spouse is determined. (Code Sec. 2010(c)(4))

A surviving spouse (for convenience we’ll assume it is the wife in this discussion) may use the deceased spousal unused exclusion amount in addition to her own basic exclusion for taxable transfers made during life or her estate may use it on the estate tax return at her death.

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by the surviving spouse is limited to the lesser of the applicable exclusion amount (for example, $5.12 million if the spouse died in 2012) or the unused exclusion of the last deceased spouse. (Code Sec. 2010(c)(4))

For the surviving spouse or her estate to use the deceased spouse’s unused exclusion amount, the predeceased spouse's estate must make an election – referred to as the portability election – on a timely filed estate tax return (Form 706) that includes a computation of the unused exclusion amount. To make the portability election, Form 706 must be filed even if the value of the gross estate is not enough to otherwise require filing an estate tax return. See temporary regulations § 20.2010-22T for detailed rules and guidance on the portability election.

This excerpt is pulled from the Big Book of Taxes 2012 courtesy of Lee T. Reams, Sr.

 

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