On January 2, 2013, Congress and the President signed The American Taxpayer Relief Act which made permanent the $5 million estate and gift tax exemption and indexed that amount to inflation. The indexed amount for 2013 is $5.25 million.
Estate Tax Portability
The Act also made permanent portability, which allows a surviving spouse to utilize any of her deceased spouse’s unused lifetime gift and estate tax exemption. For example, the surviving wife of a husband who left $3 million to a bypass trust and/or directly to heirs other than her would be allowed to add the unused $2.25 million portion of her husband’s exemption to her own lifetime estate tax exemption of $5.25 million. Therefore, she would be entitled to transfer $7.5 million to heirs free of estate and/or gift tax.
Combined, married couples are now able to transfer $10.5 million of assets during their lifetimes or upon deaths to their children and grandchildren without incurring any gift or estate tax. This amount will be adjusted annually for inflation and includes all reportable gifts from prior years. In addition to the lifetime exemption, each spouse is able to gift $14,000 per person per year without incurring any gift tax.
An important caveat on portability is that in order for the surviving spouse to be entitled to the deceased spouse’s unused estate tax exemption, an estate tax return must be filed within nine months of the date of death. This is true even if the estate is not required to file a return because it is below the exemption amount. Also, if a surviving spouse remarries, she is only entitled to the unused exemption of her most recently deceased spouse.
Estate tax is not solely a federal issue, but exists at the state level as well. As of January 1, 2013, Ohio eliminated its estate tax. In prior years, estates in excess of $338,333 were subject to Ohio estate tax.
Tax Reducing Bypass Trusts
In many circumstances, the current estate tax environment may eliminate the need for complex and expensive bypass trusts. However, this would only apply to trusts that were created in order to minimize estate taxes. Trusts that were created for reasons other than tax reduction, such as control and/or creditor protection, would not be impacted by these changes in tax law. Taxpayers who are residents of a state that imposes an estate tax might wish to continue their bypass trusts in order to reduce their state’s estate tax.
Ohio Estate Planning Help
These developments provide an opportunity to transfer wealth without incurring gift and estate tax. Now is an excellent time to meet with your advisors in order to ascertain that your wills and trusts remain viable and that you have the proper durable power of attorney documents in place for financial and healthcare matters. Email Rea & Associates to learn more about the importance of reviewing your estate plan. Our Ohio tax planning team will help create a plan that leverages these recent tax developments.