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IMPORTANT ALERT: 2013 Estate and Gift Tax Update

On Wednesday, January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the "Act") thereby averting the "fiscal cliff" and establishing a "permanent" set of estate and gift tax rules. Although these rules are not set to expire or "sunset" at any time, Congressional reform may, and most likely will, continue in the near future with respect to the gift and estate tax rules. This article summarizes the key estate and gift tax provisions of the Act and discusses various issues the Act may present with respect to your planning.

The good news is that this legislation is much more generous than we expected and provides more planning opportunities for you and your family. For example, the estate, gift, and generations-skipping tax (GST) exemptions remain at $5,000,000, and are adjusted for inflation beginning in 2012. As a result, estate, gift and GST tax exemptions for 2013 are set at $5,250,000. Absent this legislation, the exemptions were scheduled to return to $1,000,000 in 2013.

The top estate, gift, and GST tax rates are set at 40% for gifts made or decedents dying in 2013 and thereafter. Absent this legislation, the top rate was scheduled to return to 55% in 2013.

The Act also addresses the issue of "portability." Portability refers to the ability of the surviving spouse to take and thereafter use his or her deceased spouse's remaining estate and gift tax exemption upon the surviving spouse's death. This may obviate the need of creating a separate trust (referred to in our documents as a "Family Trust") upon the deceased spouse's death to shelter the deceased spouse's remaining exemption from estate tax upon the surviving spouse's death. The Act makes this portability feature "permanent" absent future Congressional change. For example, in 2013, if neither spouse has used his or her $5,250,000 exemption and the first spouse dies in 2013, the surviving spouse will be able to elect to take the deceased spouse's exemption and increase his or her exemption at death or for gifting to $10,500,000 absent remarriage and other exceptions in the Act.

Portability does provide married couples with an option to simplify their planning; however, as with anything else, there are pros and cons to utilizing this option and most likely your current trust document does not allow for portability. Therefore, we should review your trust agreement and discuss with you whether or not your Trust should be updated to allow for portability.

Although you may decide that you do not wish to provide for portability in your trust agreement, there are other tax considerations we should discuss with you as a result of the new legislation that could require drafting changes to your Trust, such as including an option for a stepped-up income tax basis on the assets in the Family Trust upon the death of the surviving spouse. Most likely your current trust agreement does not allow for this important option.

In light of this new legislation, we encourage each of you to call our office to schedule an appointment for us to review your existing plan as we believe this new legislation will necessitate changes to your plan regardless of the size of your estate or the nature of yourassets.

It is important to note that the annual gift exclusion is still available under the ACT and has increased to $14,000 per person per donee beginning in 2013. Likewise, you remain able to pay someone's medical bills and tuition without reducing your $14,000 annual exclusion or your $5,250,000 gift exemption provided you make your payment directly to the service provider and not to the individual whom you wish to support.

For our higher net worth clients, although this legislation is "permanent," the fear remains that Congress will change its mind again and reduce the estate, gift and GST exemptions in the future. Furthermore, there are other Congressional changes we anticipate may occur soon, such as abolishing valuation discounts and reducing the benefit of creating GRAT's. Therefore, you should consider using some or all of your exemption in the near future through additional gift planning.

Grantor Trusts may also be subject to attack by legislative action. A Grantor Trust is an irrevocable trust with your family members as beneficiaries into which you have gifted assets; however, you continue to pay the income tax on those gifted assets. The Grantor Trust does not pay any income tax. For those clients who have created Grantor Trusts in the past, we highly encourage you to contact our office to discuss what if anything should be done with these Grantor Trusts in anticipation of future legislation.

After you have reviewed this article, please do not hesitate to contact us with any questions or concerns you might have. In any event, you should arrange a meeting with us so that we may review your existing Trust Agreement to ensure it meets with your wishes given this new legislation.

We look forward to hearing from you.