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Estate Planning and Tax Update - January 2013

January 11, 2013

On January 2, 2013, President Obama signed the American Taxpayer Relief Act (2012 Taxpayer Relief Act) into law. The following summary describes key provisions of the Act that relate to the Federal Gift Tax, the Federal Estate Tax and the Federal generation-skipping transfer (GST) tax.

Permanent Exemption Amounts and Increased Maximum Tax Rates
The Federal Gift Tax exemption amount is the total amount of taxable gifts (i.e. gifts that do not qualify for the annual exclusion ($14,000 in 2013) or the unlimited medical or educational gift tax exclusions) that an individual may make during his or her lifetime without incurring a Federal Gift Tax.

The Federal Estate Tax is imposed on property transferred at death to the extent that the value of such property (other than property transferred to a surviving spouse or to charity) exceeds the unused portion of the decedent's Federal Estate Tax exemption amount. Lifetime taxable gifts reduce the Federal Estate Tax exemption amount available at death.

The Federal GST tax applies to transfers made to skip persons - grandchildren or more remote descendants or unrelated individuals who are more than 37.5 years younger than the donor - and to gifts made to GST Trusts which have skip persons as beneficiaries and/or "skip" the Federal Estate Tax on the death of a younger generation beneficiary.

The Act permanently unifies the Federal Gift Tax exemption amount and the Federal Estate Tax exemption amount at $5,000,000, indexed for inflation. The Act also permanently sets the Federal GST tax exemption at an amount equal to the Federal Estate Tax exemption amount and the Federal Gift Tax exemption amount. In 2013, the exemption amounts are predicted to be $5,250,000 based on the most recent inflation data ($2,045,800 unified credit amount).

The Act increases the maximum tax rate from 35% to 40% for gifts and transfers made during lifetime and for decedents dying on or after January 1, 2013 with Estates in excess of the exemption amount.

Permanent Portability of Unused Exemption Between Spouses
The Act makes permanent the ability of a Personal Representative of a deceased spouse's Estate to elect to allow his or her surviving spouse to use the deceased spouse's unused exclusion amount (DSUE) remaining at death (referred to as "portability"). The DSUE is in addition to the surviving spouse's Federal Estate Tax exemption amount and Federal Gift Tax exemption amount. To make the portability election, a United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706) must be filed for the deceased spouse's Estate. After the election is made, the surviving spouse may apply the DSUE amount received from the Estate of his or her last deceased spouse against any tax liability that would otherwise arise from subsequent lifetime gifts and/or transfers at death.

How the Act Affects You
The 2012 Taxpayer Relief Act makes permanent the largest exemption amounts against estate, gift and GST tax in the history of the Federal transfer tax system. The current estate planning environment (i.e., low interest rates, continued viability of Grantor Trusts, Grantor Retained Annuity Trusts and valuation discount planning) together with the increased exemption amounts present significant wealth transfer opportunities.

In light of the recent tax changes, you may wish to contact a member of our Estate Planning team to confirm that your estate plan and/or gifting plan continues to be appropriate.

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