Anderson Banta Clarkson, PLLC: 2013 Estate Tax Law Update

Anderson Banta Clarkson, PLLC

2013 Estate Tax Law Update
by Tom Bouman

Effective January 1, 2013, the “American Taxpayer Relief Act of 2012” signed by President Obama, provides a welcome dose of certainty to the estate tax laws. The new law maintains the current law for the most part, while indexing the estate, gift, and generation-skipping transfer (“GST”) tax exemptions for inflation.

For persons dying in 2013, the estate, gift, and generation-skipping transfer (“GST”) tax exemptions are $5.25 million, up from $5 million in 2012. The maximum federal tax rate is 40% (up from 35% in 2012). The new law continues to permit unlimited deductions for qualified transfers to a surviving spouse or charities.

A major feature introduced by the 2010 Tax Relief Act – “exemption portability” – was made permanent by the new law. This feature allows married couples to share their estate tax exemptions, making it simpler to shelter up to $10.5 million from estate taxes. For example, if Husband dies in 2013 with a $2 million estate, then Wife may have an $8.5 million exemption ($5.25M for Wife + $3.25M unused by Husband).

At first glance, the portability feature provides an attractive alternative to the traditional use of a Credit Shelter trust (aka Bypass trust) during the lifetime of the surviving spouse. In fact, it may be the best choice in some situations. However, a closer look reveals many reasons to continue with traditional planning rather than rely on portability of the unused exemption.

In order for Wife to claim the additional unused exemption upon Husband’s death, she will have to file a federal estate tax return (when it would otherwise be unnecessary).
A Credit Shelter trust provides asset protection for the surviving spouse (outright distribution does not).
A Credit Shelter trust protects the deceased spouse’s children in the event of remarriage by the surviving spouse.
Any appreciation of assets in a Credit Shelter trust is exempt from estate tax, but the “portable” exemption amount is not inflation-adjusted.
Many states (not Arizona) have a separate estate tax, but do not provide the same portability offered by the federal tax system.
The portability feature is only applicable if both spouses die when the feature is in effect. Of course, Congress could change the law at any time.

Whether a person is married or single, if the person’s current net worth – plus the value of life insurance death benefits – is more than $1 million, an estate plan review is appropriate in light of the new tax law. If married, it is important to review any formulas used in the will or living trust that would be used to allocate assets to a Credit Shelter trust upon the death of the first spouse. The $5.25 million exemption amount and portability rules may provide an opportunity to simplify the tax planning components of the estate plan.

I also want to counsel against overemphasis of estate tax planning. This is only one component of a comprehensive estate plan, which includes a wide array of non-tax objectives. However, the changing tax landscape should serve as a reminder that we should all revisit our estate plan regularly.

About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.