Since 2001, federal estate (“death”) and gift taxes have been on a roller coaster ride, with changing exemption levels and tax rates. In 2010, these taxes even disappeared completely for one year. This constant change made estate planning very difficult.
The Taxpayer Relief Act of 2013 addresses this problem by setting permanent exemptions and rates. Without congressional action, the rate was set to a 55-percent tax rate for amounts above $1 million.
The estate and gift tax exemption is now set at $5 million per person or $10 million per couple. These amounts are based on 2011 rates and will be indexed for inflation. The exemption for 2012 was $5.12 million and for 2013 is estimated at $5.25 million, or $10.5 million per couple.
At these levels, more than 99 percent of Americans will pay no federal estate and gifts tax at all.
Generation Skipping Tax
Generation-skipping tax is owed when a transfer is made to a grandchild or unrelated person who is more than 37-1/2 years younger than the donor. Under the new law, the GST exemption is permanently tied to the estate and gift tax exemption of $5 million, indexed for inflation.
Increased Rate on Excess
Any money above the exempted amount will be taxed at 40 percent, an increase from the previous rate of 35 percent.
“Portability” Now Permanent
A surviving spouse has the right to use the unused portion of a deceased spouse’s exemption, so long as the surviving spouse does not remarry. This concept was enacted by the Tax Relief Act of 2010. It was made permanent by the Taxpayer Relief Act of 2013.
This new law applies only to federal taxes. Since 2001, 31 states have taken estate taxes off their books. The remaining states with estate taxes have much lower exemptions than the federal tax, and tax rates above those amounts from five to 16 percent. Connecticut is the only state with a gift tax.
Gift Tax Exclusion
The amount of an annual gift excluded from federal gift tax has been indexed for inflation, rising every few years in increments of $1,000. In 2012, the amount was $13,000 per person. In 2013, it will be $14,000 per person, or $28,000 per couple.
Money spent on education and qualified medical expenses is also excluded from gift tax, as long as it is paid directly to the educational or medical institution. Gifts can be given in $14,000 chunks to as many people as you like – relatives, friends or even complete strangers - and are not counted as income to the recipient.
Call a Tax or Estate Lawyer
The laws surrounding estate and gift taxes in estate planning are complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax or estate lawyer.