April 11, 2013

Estate Planning in a Post 2012 Taxpayer Relief Act Environment

In Financial Planning

For many people, the last few months of 2012 were an estate planning headache weighing the costs and benefits of gifting to children or trusts while debating whether the Federal government would increase or decrease the lifetime unified credit.  The lifetime unified credit is the total combined amount you may transfer while alive (without incurring gift tax liability) and through your estate (without incurring estate tax liability), referred to hereinafter as the “exemption amount”.  For the better part of a decade, there has been uncertainty and the looming deadline of legal change.  After the passage of the American Taxpayer Relief Act of 2012 (“Act”), we now know the rules of the game going forward.   

The Rules of the Game

The Act solidified and made permanent all transfer exemptions and tax rates.  And while “permanent” only means that this is the law until Federal government decides to change it, the Act still comes as a relief since we have lived with a temporary tax code for the last ten years.

 The total exemption amount is now fixed at $5,000,000 per person, and is tied to inflation beginning in 2011.  Therefore, the actual exemption amount for 2013 is $5,250,000 and that number will continue to increase. The tax rate is now fixed at a flat rate of forty percent (40%) for every dollar over the exemption amount.   

As stated above, the total exemption amount also includes what may be gifted away during your lifetime.  If you use $2,000,000 of your exemption amount gifting assets while you are alive, that will leave a remaining exemption amount of $3,250,000 for any transfers at death.  However, the annual exclusion amount, which is tied to inflation and is the amount you may give to a person every year without using a portion of your lifetime exemption, has increased from $13,000 per recipient to $14,000 per recipient.  This annual exemption gifting continues to be a great way to transfer assets over a long period of time.

The generation-skipping transfer (GST) tax exemption is the same as the exemption amount: $5,000,000 per person and tied to inflation. Therefore, the 2013 GST tax exemption is $5,250,000 per person.  This tax is in addition to the estate tax, and imposed on any transfer of assets that skip a generation (defined in the tax code).  

Another provision that was made permanent is “portability.”  Portability allows any unused exemption of the first spouse to die to be transferred to the surviving spouse by filing an estate tax return and making the proper election.  

A Few Thoughts

1.       Though we have the highest exemption levels in history, thoughtful and intentional estate planning is still very important.

Estate planning is about transferring assets in a thoughtful way that benefits and provides care of the decedent’s loved ones and takes into consideration a myriad of factors.  However, many people become fixated on reducing tax liability and let the financial side of things dominate nonfinancial considerations.  Now that the exemption amount is permanently fixed at a historically high level, it may afford families the opportunity to make estate planning decisions based on more than lowering their tax bill.  For many families, removing the estate tax as a consideration may liberate them to think through other issues, such as how and when children should receive their inheritance, in what form they should receive their inheritance, and how family dynamics will be affected by passing certain assets.

Some people may think that since they are not close to having a federally taxable estate that thoughtful estate planning isn’t really necessary.  This faulty thinking relieves people of the sense of urgency required to get estate planning completed.  Well-done estate planning accomplishes many things over and above tax planning, as discussed above; how parents handle the transfer of wealth to children and grandchildren sends a message to those descendants, whether good or bad, and leaves a legacy for their family.   

Estate planning for all families should include an eye toward all factors, most importantly, what is best for the family, the beneficiaries, and the individual.  Other factors may include creditor protection, control over the assets after death, and tax ramifications, among others.

2.       Max funding a credit trust isn’t a foregone conclusion now.

A common estate planning technique to shelter more assets into the credit trust was for the surviving spouse to disclaim assets and exercise non pro rata distribution of community property in order to more fully fund the credit/bypass trust.  However, with compressed tax brackets for trusts and higher tax rates across the board, leaving certain assets outside of the trust may be the better bet when looking at the whole tax picture.  After only $11,950 of income, trusts pay the top rate of 39.6%.  A tax analysis needs to be done before automatically doing everything necessary to fund the credit trust with maximum assets.  


Congress has given us certainty in the form of permanent exemption amounts and tax rates moving forward.  This has taken the guess work out of the estate planning process and gives us the rules of the game.  Allow this to spur you on to get the job done, not wait another year.


By Kurt Biederman, JD

Associate Relationship Manager 

Insights Tags

Related Articles

February 13, 2024

New Federal Reporting Requirement for Beneficial Ownership Information

Overview: A new reporting requirement has gone into effect as of January 1, 2024, that will affect small entities operating in the US – including most corporations, LLC’s, and partnerships established by individuals for estate and financial planning purposes. Affected entities will be required to disclose their Beneficial Owners’ Information (“BOI”) to the Financial Crimes [...]

Glen White
Contributions from: Glen White

October 26, 2023

Getting the Most from Your Amazon Benefits

Amazon provides generous company benefits that can help you build wealth, manage risk, and secure your future. It’s important to consider how to best integrate the additional compensation, retirement, and health benefits into your financial plan. Equity Awards Your grants of Amazon restricted stock units (RSUs) can help increase your cash flow or meet long-term [...]

Katie Mietus
Contributions from: Katie Berntson, CFP®

August 15, 2023

Funding Graduate School by Gifting Appreciated Stock

If you have a student attending graduate school this fall, the tuition payment due date is quickly approaching! Clients who plan on funding all or a portion of the tuition for adult children or relatives often ask what the optimal funding method is – especially if other allocated savings, such as 529 College Savings Plans [...]

Katie Mietus
Contributions from: Katie Berntson, CFP®