For a long time, there was talk about upcoming changes in both the Federal Tax Code for income tax and estate tax issues. Well, the time has come. Below are 4 of the most significant changes in the Estate Tax Law. Keep an eye out for our blog on the Federal Income Tax Code to be posted later!
Estate Tax Changes
New and less favorable estate, gift, and generation-skipping transfer tax exemptions will go into effect in 2013. Under the current law, the estate tax exemption is scheduled to drop significantly from $5.12 million in 2012 to $1 million in 2013. The estate tax rate is scheduled to jump from 35% to 55%. Also, the lifetime gift tax exemption will also be $1 million and the maximum gift tax rate will be 55% similar to that of the estate tax exemption. The generation skipping transfer tax exemption will be approximately $1.4 million with a top tax rate of 55%.
Portability of federal estate tax tax exemptions between married couples will disappear. This would allow up to $10.24 million to pass from married couples to their heirs free from federal estate taxes with no planning. This will not longer be in effect, which means that AB trust planning, which was necessary before 2011, will again be necessary.
The Return of the Pick Up Tax. The pick up tax was a state estate tax that was equal to a portion of the federal estate tax bill and was collected by state taxing authorities. Thus will result in state estate taxes if/when it returns. This does not apply to all states because some states. New Jersey does have a pick-up tax, thus it will be more expensive to settle an estate and an additional state estate tax return will be required to be filed.
Careful planning will be required for generation skipping trusts. This exemption allows for $400,000 more dollars than the estate tax exemption. This means that married couples that have included generation skipping trusts in their plan will need to include special generation skipping transfer tax planning documents in order to take full advantage of both spouses’ generation skipping transfer tax exemptions.
A Generation Skipping trust is a type of irrevocable trust that is designed to eliminate estate taxes at each generational level and continue for as many generations as allowed by applicable law. AKA: Dynasty Trust.