The Impact of the American Taxpayer Relief Act of 2012 (ATRA) on Estate Planning

On January 1, 2013, Congress passed the American Taxpayer Relief Act (ATRA), and shortly thereafter, President Obama signed the bill into law on January 2, 2013, ending what many had worried would lead to falling off of the “fiscal cliff,” being the scheduled radical reduction in estate tax and gift tax exemptions, and significantly higher estate tax and gift tax rates. With the passing of this important legislation, it is prudent to understand how these new laws may impact your personal estate planning.

Highlights of the American Taxpayer Relief Act (ATRA)

The following is a summary of the significant provisions of ATRA:

• Sets a permanent 40% top tax rate for estate, gift and generation-skipping transfer (GST) taxes in excess of the exemption amount
• Unifies estate and gift tax exemptions and currently sets these exemptions, as well as the generation-skipping transfer (GST) tax exemption, at $5.25 million per individual
• Makes permanent “portability” possible by allowing the surviving spouse to elect to add the unused exclusion of the decedent to the surviving spouse’s exclusion, meaning that married couples currently can pass $10.5 million of assets without the worry of gift or estate taxes

Increase in the Annual Gift Tax Exclusion

In addition to the changes brought about by the American Taxpayer Relief Act (ATRA), the annual gift tax exclusion amount was increased to $14,000.00 per designee beginning January 1, 2013. This is an inflation-adjusted increase from $13,000.00 in 2012. Married couples may combine their annual gift tax exclusion amounts, which allows them to make tax-exempt gifts totaling $28,000.00 per designee.

Planning Beyond 2013

For many individuals who may have delayed estate planning due to the uncertainty that existed in 2012, now is the time to implement new estate plans, given the apparent stability in rates and exemptions for the foreseeable future. Even if estate taxes are not a primary focus or an issue for individuals, proper estate planning can be essential in offering protection from creditors and divorcing spouses, as well as offering protection to children and beneficiaries. Additionally, a well-developed estate plan can provide benefits in income tax planning, which is now particularly important for individuals who find themselves in higher tax brackets. Finally, proper planning is essential to small business owners who wish to do business succession planning to determine how their business will be controlled after their death, as well as which family members or business associates will benefit from and carry on the business.

Reviewing Existing Plans

Equally important to the planning process is the necessity of evaluating current family dynamics and changes in relationships which might affect the choices which individuals have made in existing documents, including whom they wish to appoint to make decisions for them under their health care power of attorney or general durable power of attorney, to act as guardians of their minor children or as trustees of their trusts, or to act as executors of their estate.

Another important issue in evaluating existing estate plans is the need to adequately review the often overlooked status of beneficiary designations on joint accounts with right of survivorship, insurance policies, and retirement accounts. The failure to properly coordinate these designations with the estate plan can cause assets to be distributed to persons which the individual did not intend, in a manner inconsistent with the overall estate plan, due to an incorrect or out-of-date beneficiary designation or account styling. This can also lead to estate tax and income tax implications that were unintended.

The American Taxpayer Relief Act (ATRA) has significantly impacted tax planning for individuals in the estate planning process. There are a number of important issues beyond estate and gift tax planning which all individuals should address and periodically review in order to secure their future and the future of their family and loved ones.

Ryan A. Randall, ranked as a Five Star Professional by Texas Monthly Magazine, concentrates his practice in Estate and Tax Planning, Asset Protection Planning, and Business Succession Planning.