Congress surprised us again and passed the American Taxpayer Relief Act (don’t you love the catchy name) on January 1 to temporarily avoid the fiscal cliff.
Overall, the new law is much better than the experts expected. It extends the estate tax and gift tax exclusions of 2012 and even indexes them for inflation. In 2013, you can gift $5,250,000 with no gift tax. In 2013, you can die with $5,250,000 with no estate tax. A married couple can double this amount. The tax rate for gifts or estates greater than $5,250,000 rose to 40% from 35%. But so long as your estate is less than $5,250,000, or $10,500,000 for a married couple, there won’t be a tax.
So what does this mean for you?
We will be telling our clients through our newsletter (you can sign up below) that the planning environment is very similar to what it was in 2012.
Consider gifting now.
Real Property. For most people, property values are still low from the long recession. Now is a great time to gift. By gifting now, you will remove assets from your estate at the low value. When the assets appreciate in value again, it will be outside your taxable estate. For example, gift a $1M property now and use only $1M of your gift exclusion. In 10 years, the property may be worth $2M, and it will be outside your taxable estate, and you only burned $1M of your gift exclusion.
Your Business. Gifting now is also a great strategy if you own a business. If you have a business that was hit by the recession, it might be a good time to gift all or some of the business while the value is low. Then the share gifted and all future appreciation will be outside your estate.
Investment Accounts. The same principle holds for investment accounts. If you believe the economy will rebound soon, your stock values may be lower now than in a few years from now. Why not consider gifting now at the low value?
How to Gift and Still Control and Use the Assets?
Ok, so you get the concept of gifting now at low values, but you can’t afford to gift because you need your assets. What can you do? Why not gift assets in a trust to your spouse? This type of gift trust is called a Spousal Lifetime Access Trust (SLAT) or a lifetime bypass or exemption trust.
If you set up a SLAT, your spouse can be the trustee and primary beneficiary. You would then gift assets to the trust for the benefit of your spouse. As trustee, your spouse would have control of the assets, i.e. your spouse would be able to decide how to invest and when and how much to distribute out. If you have a solid marriage, you would have a say in those decisions and you would benefit from the distributions and growth of the trust assets.
Key Concept. If you have a solid marriage, you have amazing planning opportunities.
Key Concept 2. Jonathan Blatmachr, one of the top veteran estate planning attorneys in the country, likes to advise his clients to use tax deductions sooner rather than later because you never know when Congress will change the rules.
The 2013 American Taxpayer Relief Act has generous estate and gift exclusions. But will the generous exclusions last? We just don’t know. Historically, tax laws change. Favorable rates change to unfavorable rates and so it goes back and forth.
What we do know is that for many, asset values are lower than they will be in the future. Now may be the perfect time to remove assets from your estate to a trust for your spouse. You will continue to indirectly control and benefit from the assets while removing the assets and all future appreciation forever from your taxable estate.