Think you heard the last of the debate over estate and gift tax reform when President Obama signed The American Taxpayer Relief Act (ATRA) of 2012 in early January? Well, think again. This legislation established and made permanent the current estate tax parameters. But, permanent doesn’t always mean permanent in Washington.
Only three short months later, estate taxes were back on the table. The President’s 2014 fiscal budget proposal, released in April, includes significant changes to estate and gift taxes including undoing the so‑called “permanent changes.” While the budget will likely face a number of revisions before it reaches its final form and many of these proposals will never become law, it is still important to take a look at the proposals to see what changes we might soon be seeing in the tax law. According to an AICPA analysis, if the President’s 2014 fiscal budget proposal passes, the following would be implemented (after December 31, 2017):
- The per-person estate tax exemption would drop from the current level of $5.25 million, as indexed for inflation, to $3.5 million and would not be indexed for inflation.
- The top estate tax rate would jump from the current level of 40% to a maximum of 45%.
- The lifetime gift tax exemption would decrease to $1 million and would not be indexed for inflation.
If you are one of the millions of taxpayers who elected to take a “wait-and-see” approach in 2012, you may want to rethink your strategy. While it is impossible to predict the timing and content of the next tax act, now is an ideal time to take advantage of the estate and gift tax provisions of the ATRA.
Gifting remains an effective estate planning tool. The annual exclusion increased from $13,000 in 2012 to $14,000 in 2013. This means that you can gift $14,000 per individual, or $28,000 for a married couple, to as many individuals as you would like, without eating into your lifetime exemption. Also, for the immediate future, the applicable exclusion amounts will continue to be indexed for inflation annually. With the current $5.25 million lifetime exemption, gifting allows you to remove considerable asset value and subsequent appreciation from your estate.
The October 1st budget deadline looms only weeks ahead. No one knows what provisions of President Obama’s proposed 2014 fiscal budget will wind up in the final version. We do know that permanent isn’t always permanent, especially with estate and gift taxes.
Have questions about the tax implications of gifting or estate planning? Contact your RKL Tax Advisor.
Contributed by Gretchen G. Naso, CVA, MBA, a principal in RKL’s Business Consulting Services Group. A Certified Valuation Analyst, Gretchen has extensive experience in general and family limited partnerships and valuations for financial reporting, purchase price allocation and gifting and estate tax purposes.