How Does the New American Taxpayer Relief Act Affect Estate Planning?

A few of our previous blogs have discussed highlights from the American Taxpayer Relief Act (ATRA) and how income taxes and charitable planning are affected.  This blog will highlight the impact of ATRA for estate planning purposes.  Here are some key estate planning aspects of ATRA to consider:

1)   For Federal estate and gift tax purposes, the lifetime gift tax and estate tax exemptions will remain at the same exemption amount (in 2013, the exemption or "threshold" or "coupon" amount is $5.25 Million).  The exemption amount is indexed for inflation for future years.  Any amounts over the exemption amount will be taxed at 40%.  For gift tax purposes, this means that a taxpayer will not have to pay a gift tax unless the taxpayer makes lifetime gifts above the exemption amount.  For estate tax purposes, a taxpayer will not owe a federal estate tax unless the exemption amount is exhausted by gifts during life or by the estate value upon the taxpayer's death.

2)  In Massachusetts, it is very important to note that the law has not changed and the separate state level estate tax remains in effect.  The threshold for Massachusetts purposes remains at $1M.  As such, an estate tax will be imposed for estates above $1M in Massachusetts.  There is no gift tax in Massachusetts.

3)  On the federal level, any portion of an exemption not used by the first spouse to die of a married couple can be added to the exemption of the surviving spouse.  This is known as "portability" or "DSUE" (deceased spouse's unused exemption).  Portability applies if the surviving spouse does not remarry or in the event of remarriage as long as the surviving spouse survives the subsequent spouse.  Portability does not apply on the state level for estate tax in Massachusetts.

4)  The generation skipping tax (the "GST tax") exemption remains equal to the amount of the federal gift and estate tax exemptions.  The GST tax is a separate tax in addition to the federal estate tax.  It imposes an additional tax if a taxpayer tries to pass wealth down to younger generations and thereby skip an entire generation (an example would be passing wealth down to grandchildren and bypassing the taxpayer's children's generation).  The idea behind the tax is that the government wants to be able to tax at each generation.

Even if your estate does not reach the thresholds listed above, it still makes sense to make sure that you have a proper estate plan in place.  In addition to doing estate planning for tax purposes, estate planning can be done in order to plan for incapacity, to avoid probate upon death, to plan for the care of children, to make sure that your assets are being passed down in the way you want, and for various other reasons.  Contact an estate planning attorney so that you can discuss your particular situation and so that you can make sure that you have something in place that makes sense for you and what you want.

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At O'Connell Law LLC, located on Route 16 in Natick, Massachusetts, we help individuals with wills, trusts, powers of attorney, health care documents, asset protection, Medicaid planning, special needs planning, charitable giving, business succession planning, probate administration, and trust administration. We represent clients throughout Middlesex County and Norfolk County. This includes Ashland, Boston, Boxborough, Cambridge, Dover, Framingham, Harvard, Holliston, Hopkinton, Hudson, Lincoln, Marlborough, Maynard, Medfield, Medway, Milford, Millis, Natick, Needham, Newton, Sherborn, Southborough, Stow, Sudbury, Wayland, Wellesley, Westborough, Weston, and Westwood.

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