Mid-Atlantic Health Law TOPICS

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Estate Planning's Fiscal Plateau

Before Congress averted the Fiscal Cliff, federal estate planning law was scheduled to revert to a much harsher wealth transfer tax system, with only a $1 million federal estate, gift and generation-skipping transfer tax (GST) exemption, and a top tax rate of 55%. However, the American Taxpayer Relief Act of 2012 (the 2012 Act) kept us from going over that cliff, and contained some welcome news for estate planning during the current fiscal plateau.

A. The 2012 Act

The 2012 Act provides for:

1. A $5 million (adjusted for inflation) exemption from federal taxes for estate, gift and GST purposes. For 2013, the exemption is $5,250,000.

2. A top federal estate, gift and GST tax rate of 40% - up from 35% but far less than 55%.

3. The retention of "portability" - the ability of a surviving spouse to use the unused federal estate tax exemption (but not GST exemption) of his or her most recently deceased spouse. Thus, if the first spouse to die did not use any of his or her estate tax exemption, the surviving spouse may have $10.5 million of estate tax exemption to use with respect to his or her estate or gift tax.

4. The reinstitution of the $100,000 IRA charitable rollover through 2013 for persons over 70-1/2, which allows people to donate IRA funds to charities without having to pay income taxes on the IRA distributions.

5. No built in termination date which would cause a reversion to a prior law.

B. Estate Planning Opportunities

Many doctors and hospital and health care executives implemented gifts before the end of 2012. For the vast majority of those who did so, those were gifts that, objectively speaking, were advisable a long time ago. It simply took the pending reversion to a harsher wealth transfer tax system to provide the impetus.

However, those planning opportunities still exist. Thus, if you did not make gifts in 2012, serious thought should be given to this second chance to make a gift now. One of the key benefits to making a large gift is the removal of the post-gift appreciation of the asset from your estate. Accordingly, the sooner you make the gift, the more your estate will benefit.

C. Gift Tax Annual Exclusion

Unrelated to the 2012 Act, the amount which one can give to any one recipient during the calendar year without any gift or estate tax consequences has increased from $13,000 per recipient to $14,000 per recipient.

Also, the tax laws allow direct payments of qualifying tuition or medical expenses on behalf of an individual without having those gifts consume any portion of the $14,000 annual exclusion or the estate and gift tax exemption amount.

Additionally, you may want to take advantage of the option to contribute five (5) years of the annual $14,000 exclusion to a child's Section 529 college savings account in a single year, for a total of $70,000.

D. Maryland Estate Tax

Lastly, it should be remembered that Maryland assesses an estate tax on estates valued at more than $1 million. This includes the value of your liquid assets, retirement accounts, life insurance policies which you own, equity in your home, business interests, and other assets.

Another reason to consider a gift is that Maryland does not add back gifts made during your life to the computation of the Maryland estate tax. Federal law requires that the amount of gifts in excess of your annual exclusion and exclusions for gifts for tuition and medical expenses must be added back.