After sessions lasting late into the night on New Year’s Eve and New Year’s Day, Congress has passed a tax bill that, among other things, resolves the past few years of uncertainty for gift and estate tax planning. Just before the ball dropped on 2012, we had a $5.12 million federal gift and estate tax exemption and a tax rate of 35% on each dollar over the exemption. Until this agreement is signed into law, which President Obama is expected to do in the coming days, we actually have a $1 million federal gift and estate tax exemption and a tax rate of 55% on each dollar over the exemption.
The bill being signed into law is retroactive to January 1st and keeps the federal gift and estate tax exemption amount at $5.12million, while bringing the tax rate for every dollar above that to 40%. The exemption amount is tied to inflation and will increase automatically in future years. Unlike the last few changes to the gift and estate tax laws, this change is permanent – meaning there is no scheduled end to this exemption amount or this tax rate. However, Congress could revisit this issue at any time and make changes.
As previously scheduled, the federal annual exclusion has increased from $13,000 in 2012 to $14,000 in 2013.
Everyone should review their estate plan every 3-5 years, or sooner if there is a marriage, divorce, birth, death or a material change in assets. Changes to the estate tax laws are also a good time for people to confirm that their estate plans still reflect their intentions and still operate the way they were intended to. Those estate plans that were created and funded with a $5 million exemption in mind should still work as intended. However, those with assets greater than $5 million may wish to be more aggressive in gifting assets that are likely to appreciate and in utilizing their annual exemption amount.
It is important for Massachusetts residents to remember that this will not impact Massachusetts estate taxes in any way – we will still have a $1 million Massachusetts exemption with a tax rate of between 6-12% on the total estate. Massachusetts does not have a gift tax and we do not expect one to be imposed at any time in the foreseeable future.