Estate and Gift Tax Update

by Carrie Buddingh

Crisis averted!  Well, for the time being at least.  As you probably know, on January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (“ATRA-2012"), which prevented our nation from going over the “fiscal cliff.”  You may now be thinking, “What does this new law mean to me and my estate?”  “Has anything changed at the state level?”  Or even, “I thought the gift and estate tax law just changed in 2010.  What changed this time?”  You are in luck! Below please find a concise description of the current changes in the law that took effect January 1, 2013:

• The estate, gift, and generation-skipping transfer (“GST”) tax exemptions have been permanently increased to $5 million (adjusted for inflation).  That means that the exemption amount for 2013 is now $5.25 million.  However, the top estate, gift and GST tax rates have also been increased to 40%.
  
• For decedents who pass away in 2013 or later, the Illinois estate tax exemption has been increased to $4 million.  Please note that Illinois does not currently tax any gifts (regardless of their size) made by an individual during his or her lifetime.
  
• The "portability" provisions introduced under the 2010 Tax Relief Act have become permanent as well.  Portability allows a surviving spouse under certain conditions to elect to use the unused portion of the predeceased spouse’s federal exclusion amount for estate or gift tax purposes.  Please note, however, that no such provisions apply under Illinois law.
  
• ATRA-2012 extends the provisions that allow individuals age 70 ½ and older to make tax-free IRA distributions directly to a charity up to $100,000 in lieu of taking a required minimum distribution (“RMD”) in such amount and paying the resulting income tax.  This is often called qualified charitable rollover (“QCR”).
  
•  In addition, for a limited time, Congress is allowing individuals to reclassify gifts made to a qualifying charity as a 2012 QCR if such gift is made prior to February 1, 2013.  Thus, for example, if an individual took an IRA distribution after November 30, 2012 and then paid it to a qualified charity before February 2013, then the individual can claim such payment to the charity as a QCR for 2012.
  
• Not part of ATRA- 2012, but effective January 1, 2013 under the pre-existing gift tax law, the gift tax annual exclusion is $14,000 per donor per donee. The GST tax annual exclusion is also $14,000 for “direct skip” outright gifts to grandchildren or others more than one generation removed from the donor.
  
• The “step-up” upon death of the cost basis of a decedent’s assets continues to apply.