By Marla B. Matthews
January 15, 2013
By Marla B. Matthews
January 15, 2013
The American Taxpayer Relief Act of 2012 (“ATRA”), Congress’s effort to avoid the so-called “fiscal cliff,” introduces a number of important changes to the tax laws that will impact our estate planning clients.
ATRA provides a permanent extension of the Bush tax cuts for individuals with taxable incomes under $400,000 and for married couples with incomes under $450,000. The tax bracket for individuals with incomes in excess of $400,000 and married couples with incomes in excess of $450,000 (“high income filers”) is now 39.6 percent. ATRA also maintains the 15 percent rate on capital gains and qualified dividends for all taxpayers except for high income filers who will now be subject to a 20 percent rate. Individuals with annual incomes of at least $200,000 and married couples with annual incomes of at least $250,000 will also be subject to a new 3.8 percent Medicare Tax.
On the estate planning side, ATRA extends and makes “permanent” the $5 million federal estate, gift and GST tax exemptions but raises the top tax rate on estates and gifts from 35 percent to 40 percent. The $5 million exemption is indexed for inflation, setting the exemption amount at $5,250,000 for 2013. In addition, ATRA makes portability permanent and will likely result in clients who have chosen to forego traditional estate planning techniques needing to file a federal estate tax return in order to elect portability even if their gross estates fall below the $5 million exemption.
Individuals who reside in New Hampshire or who have real or tangible assets located in New Hampshire should also note what ATRA does not do. It does not include a state death tax credit. New Hampshire’s estate tax statute includes a sponge tax, meaning that New Hampshire only has a state-level estate tax when a state death tax credit applies at the federal level and such state level estate tax is equal to the credit taxpayers are given at the federal level. Because ATRA preserves the deduction for state level estate tax but does not reinstate the state death tax credit, New Hampshire (at least for the time being) remains one of the states that does not have a state-level estate tax.
While the new permanence of the $5 million exemption certainly changes the estate planning landscape, ATRA introduces a number of new opportunities that are beginning to become apparent now that the dust has settled.
To the extent that clients are motivated by tax planning, many clients are likely to find more opportunities in the area of basis planning than the estate tax mitigation planning that has dominated discussions over the last few years. Rather than focusing on planning designed to remove assets from the taxable estate, the indexed-for-inflation “permanent” exemption means that estate planning clients may be better served by retaining assets in their own names in order to obtain a step-up in basis for their heirs upon their deaths. In fact, we anticipate that clients may choose to unwind trusts and other entities and take other actions designed to recapture within the taxable estate assets that were previously removed.
The expansion of circumstances in which clients can rollover a 401(k) into a Roth IRA provides another new estate planning opportunity. Previously, an individual could only rollover a 401(k) into a Roth IRA within the four corners of the plan if one of three triggering events occurred — the individual changed jobs, retired or reached age 59 1/2. ATRA allows individuals to rollover a 401(k) into a Roth IRA at any time without the occurrence of a triggering event. Although individuals will be required to pay current income taxes on the value of any 401(k) plan that is rolled over, this technique allows the individual to take advantage of additional creditor protection (since a Roth IRA does not require minimum distributions) and, more importantly for some taxpayers, the rollover removes the income tax paid from the taxable estate.
In New Hampshire, ATRA is not likely to change the landscape of estate planning. As we have always stressed with our clients, there continue to be a number of varied and complex non-tax planning reasons that individuals and couples should take advantage of pre- and post-ATRA estate planning opportunities. Despite the historically high exemptions, clients continue to have concerns about the disposition of assets upon their deaths, basis planning, probate avoidance, planning for children with disabilities or problematic spouses, business succession planning, planning specific to second marriages and blended families, and asset protection. Traditional estate planning allows parents to establish a scheme for how assets will be distributed to children and, where necessary, restrict access to those assets through the use of trusts. None of these aspects of estate planning are altered by ATRA.
IRS CIRCULAR 230 NOTICE – To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication (or in any attachment included as part of this communication) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.