prepared by:
Michelle H. Gooze-Miller (North Shore Law Member)*
Brett N. Cagan
Izabela Czajkowska
On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (“ATRA”). While it did bring higher taxes in some circumstances, one of the significant benefits of ATRA is that it provides a level of certainty in the estate tax area that we have not seen in more than a decade. Because the current federal estate tax law has no scheduled expiration, individuals are now in a much better position to plan for the future.
Below is a brief summary of the key federal and Illinois estate and gift tax provisions under current law in 2013:
- Federal Estate and Gift Tax Exclusion Amount. The federal estate and gift tax exclusion is $5.25 million in 2013. This is the amount that you can give away during lifetime or at death without incurring any federal estate or gift tax. The federal estate and gift tax exclusion is indexed for inflation, so will continue to increase in future years.
- Federal Estate and Gift Tax Rates. The federal estate and gift tax rate on amounts transferred in excess of the federal exclusion amount is now 40%.
- Generation-Skipping Transfer Tax Exemption Amount. The federal generation-skipping transfer tax exemption is $5.25 million for 2013. This is the amount you can give away to grandchildren and more remote descendants during lifetime or at death without incurring any generation-skipping transfer tax (this is an additional tax on top of the estate tax for transfers to grandchildren and remote descendants and is also at a rate of 40%). The GST exemption amount also is indexed for inflation.
- Portability. The federal estate and gift tax exclusion is “portable” between spouses. That means if one spouse dies without using all of his or her available estate tax exclusion, the surviving spouse can use his or her deceased spouse’s unused federal estate and gift tax exclusion towards lifetime gifts or at death.
- Federal Gift Tax Annual Exclusion. You can give away $14,000 (or $28,000 for married couples) in 2013 to an unlimited number of donees without triggering a gift tax or reducing the amount of your federal gift tax exclusion. The gift tax annual exclusion is indexed for inflation.
- Illinois Estate Tax Exemption. The Illinois estate tax exemption amount is $4 million in 2013. This is the amount you can give away at death to someone other than your spouse without incurring any Illinois estate tax. Please note that the Illinois estate tax exemption is not indexed for inflation. The Illinois estate tax exemption also is not portable between spouses. There is no Illinois gift tax.
In addition to changes in the federal estate tax laws, ATRA addressed several key federal income tax provisions. Important changes to the federal income tax laws include the following:
- Individual Income Tax Rates. Beginning in 2013, the top marginal rate for individual taxpayers earning more than $400,000 (or $450,000 if married filing jointly, $225,000 for married filing separately and $425,000 for head of household) increases from 35% to 39.6%. The thresholds are indexed for inflation.
- Capital Gains Rates. Beginning in 2013, the tax rate on long-term capital gains and qualified dividends increases to 20% for individual taxpayers earning more than $400,000 (or $450,000 if married filing jointly, $225,000 for married filing separately and $425,000 for head of household). The thresholds are indexed for inflation. This change decreases the preferential treatment for long-term capital gains and qualified dividends.
- Partial Phase-out of Itemized Deductions. Beginning in 2013, individual taxpayers earning $250,000 or more ($300,000 or more if married filing jointly, $150,000 or more for married filing separately and $275,000 for head of household) will be subject to a “phase-out” of their ability to use certain itemized deductions, including mortgage interest, property taxes, state and local income taxes and charitable contributions. The amount of this phase-out will be equal to 3% of the excess of the taxpayer’s adjusted gross income over the applicable threshold amount, although in all events an individual taxpayer will be able to deduct at least 20% of such itemized deductions. The thresholds are indexed for inflation. This phase-out will often create an unexpected limitation on the ability to benefit from certain deductions.
- Personal Exemption Phase-out. Beginning in 2013, individual taxpayers earning $250,000 or more ($300,000 or more if married filing jointly, $150,000 or more for married filing separately and $275,000 for head of household) will be subject to a “phase-out” of the personal exemptions they can claim. The amount of this phase-out is 2% for each $2,500, or portion thereof, by which the taxpayer’s adjusted gross income exceeds the applicable threshold.
- Alternative Minimum Tax. The AMT “patch” is made permanent, limiting the number of taxpayers subject to this tax, by increasing the AMT exemption amount to$50,600 for single individuals and $78,750 for married individuals, indexed for
inflation. - Payroll Tax. The payroll tax cut was not extended and, therefore, payroll taxes will increase from 4.2% to 6.2%.
- Other Individual Income Tax Benefits. A number of individual income tax benefits were extended through 2013, but not made permanent. These benefits include relief from cancellation of debt income from principal residences, election to deduct state and local sales tax in lieu of income taxes, and tax-free distributions up to $100,000 per year from IRA accounts to public charities.
In addition to the ATRA provisions, the Medicare surtax passed under the Affordable Care Act takes effect in 2013. As a result, individual taxpayers will pay a 3.8% Medicare surtax on investment income that exceeds a minimum threshold ($200,000 for individuals, $250,000 for married couples filing jointly and $11,950 for trusts and estates). An additional 0.9% Medicare tax will be imposed on earned income that exceeds the above thresholds.
Important Estate Planning Considerations for 2013
Review and Revise Existing Estate Plan. In light of ATRA, we strongly encourage you to have your current estate planning documents reviewed to determine whether any changes are appropriate. For married clients who have not updated their documents in the last several years, it may be necessary to modify the tax formula so as to maximize use of both the federal and Illinois estate tax exemptions. Because of the increased $5.25 million federal estate tax exclusion, but only a $4 million Illinois estate tax exemption, some older formula provisions prepared under prior laws could cause an Illinois estate tax to be paid on the first spouse’s death. This tax on the first spouse’s death can easily be avoided with a slight modification in the formula language. Depending on your current net worth, it also may make sense to modify the dispositive provisions in response to the increased federal estate tax exclusion and the Illinois exclusion amount.
Make Gifts to Take Advantage of Increased Exclusion Amount. If you did not use all of your federal gift tax exclusion last year, you should strongly consider doing so now. In addition to straightforward gifting, there are any number of gifting strategies that can be implemented that will allow you to take advantage of the $5.25 million federal gift tax exclusion, while still receiving some level of benefit from the gifted assets. While lifetime gifting will reduce the amount of federal estate tax exclusion available for assets distributed at your death, it is almost always better to give away assets during lifetime rather than at death. First, when you gift an
asset you remove the future income and appreciation of the gifted asset from your estate. Second, since Illinois does not have a gift tax, any assets you gift away reduces the value of your estate that will be subject to Illinois estate taxes.
File Gift Tax Returns to Report 2012 Gifts. If you made gifts in excess of the federal gift tax annual exclusion in 2012, you must file a federal gift tax return to report those gifts by April 15, 2013. If you made gifts of assets that require an appraisal (e.g., gifts of interests in real estate or a closely-held business entity) to substantiate the value, you must attach a copy of the appraisal to your gift tax return.
If you like more information about the gift and estate planning opportunities available to you, please contact one of our attorneys in the Wealth Transfer and Estate Planning Group at (312) 551-8300.
The information contained herein is of a general nature and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. You should seek professional advice on your own situation and any specific legal questions you may have.
IRS Circular 230 Notice
We are required by Treasury Regulations (Circular 230) to inform you that, to the extent that this communication concerns federal or state tax issues, this communication (including enclosures) was not written or intended to be used, and cannot be used, for (1) avoiding federal or state tax penalties or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
* Michelle, a member of North Shore Law, practices at Patzik, Frank & Samotny Ltd. which maintains offices in both Northbrook and Chicago.
Michelle concentrates her practice in the technical and practical aspects of estate planning, probate and estate administration, advising clients on complex state and Federal tax matters, working with charitable entities and assisting with business transactions for the family business owner.
Michelle frequently assists clients with the complicated and often emotional distribution of estate assets among children, stepchildren, grandchildren and surviving spouses. She oversees the formation and operation of nonprofit entities, both private foundations and public charities, and creates a variety of charitable vehicles to carry out the plans of individual donors. As a part of her practice, Michelle provides advice regarding income, estate, gift and generation-skipping tax matters affecting individuals, estates and trusts. She also advises clients regarding business succession planning, issues involving the estate planning aspects of divorce, planning for disability and premarital agreements.
Michelle is a graduate of Northwestern University, with honors (1993), Phi Beta Kappa, and the University of Chicago Law School, with honors (1997) and is admitted to practice in both Illinois and Florida.
You can reach Michelle at her office at 312-551-8300.