Do you need to change or update your estate planning documents in light of the “fiscal cliff” tax changes?
Much talk and press was devoted at the end of last year to the “fiscal cliff.” On Jan. 2, President Obama signed into law the “American Taxpayer Relief Act.” It will be left to each individual American taxpayer to determined if he is, in fact, relieved by the outcome.
The act makes several (supposedly) permanent changes to the tax code, impacting both federal income and estate taxes. Some of the estate tax changes implemented are:
• A $5 million estate, gift, and generation-skipping tax exemption to each individual, indexed for inflation. The exemption for 2013 is $5.25 million (up from $5.12 million per individual in 2012).
• A 40 percent maximum estate tax rate for all assets transferred at death or during lifetime in excess of the federal exemption.
• “Portability” between U.S. spouses was made permanent. That is, a spouse who dies with less than the $5 million plus federal exemption may “carry over” the excess to the surviving spouse, subject to some conditions on the surviving spouse’s remarriage. In other words, U.S. spouses have a combined exemption of $10.50 million in 2013.
It is critical to keep in mind that New York State has “decoupled” from the federal estate tax regime and maintains only a $1 million estate tax exemption. There is an unlimited marital deduction (i.e., you can leave an unlimited amount of assets to a spouse), but there is no “portability” in the New York State estate tax system.
The new tax laws make aggressive lifetime planning less of a priority for individuals with less than $5 million and couples with less than $10 million in assets, but tax planning is still important in light of the comparatively low New York State exemption. This type of planning, however, is usually accomplished with lifetime transfers of assets at the death of the surviving spouse.
Second, the new tax laws may diminish the need for a credit shelter trust because of the portability exemption. A creditor shelter trust allows a spouse to provide for a surviving spouse by placing assets in a trust that, literally, shelters the tax exemption credit and allows those assets to bypass the estate of the surviving spouse, thereby avoiding some estate taxes at the death of the surviving spouse.
Portability diminishes the need for that aspect of the trust, but a credit shelter trust still offers many benefits like creditor protection, subsequent appreciation, protection from state estate taxes, and assurances that the assets will pass to the children of the first marriage if the surviving spouse remarries.
As with all legal matters, it is critical to consult an attorney to assess how changes in the law impact the facts and circumstances of your individual situation.
Alison Arden Besunder is the founding attorney of the Law Offices of Alison Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Besunder on Twitter
@estatetrustplan and on her website at www.besunderlaw.com.
