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Gift and Estate Tax Impact of the American Taxpayer Relief Act of 2012

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One of the most dramatic effects of the American Taxpayer Relief Act of 2012 (ATRA) was felt in the area of gift and estate taxes.

Pre-ATRA Situation

In 2012, the estate and gift tax exemptions, indexed for inflation, were set at $5,120,000 each (up from $5,000,000 in 2011). Moreover, in 2012, the surviving spouse could use the unused exemption of a deceased spouse (this is called “portability”). Finally, the gift tax exemption was the same as the estate tax exemption, so taxpayers could make lifetime gifts that fully utilized their exemptions. In some situations, these gifts would shift the gifted assets’ future appreciation and income out of the donors’ taxable estates. The maximum tax rate for transfers in excess of the exemption was 35 percent.

All of these provisions expired on January 1, 2013. The $5,120,000 exemption was reduced to a $1,000,000 and the maximum tax rate was increased to 55 percent; the portability provision also expired. There was also a problem of the infamous “clawback” with respect to taxpayers who gifted their property using the higher exemption limits in 2012.

ATRA Changes

ATRA corrected the negative impact of the expiration of the 2012 gift and estate tax provisions. It set the permanent exemptions at $5,000,000 with one unexpected surprise – the exemption amount was indexed for inflation. This means that, for 2013, the exemption amount is $5,250,000. The higher exemption amount also renders the clawback provision harmless at this point.

Furthermore, ATRA reinstated the portability provision so that a surviving spouse can still use a deceased spouse’s unused exemption (provided that an estate tax return is filed and the portability election is properly made). However, it should be remembered that the portability is not available for a deceased spouse’s unused generation-skipping transfer tax exemption.

On the more negative side, ATRA raised the maximum tax rate from the 2012 levels to 40 percent. On the other hand, it is still a lot lower than the 55-percent tax that would have been applicable without ATRA.

With respect to charitable contributions, ATRA reinstated the exclusion from gross income for qualified charitable contributions by taxpayers over age 70 ½ of up to $100,000 distributed from an IRA through December 31, 2013. See this article for more details.

Annual Exclusion and Form 3520 Threshold Amount

For the tax year 2013, the gift tax annual exclusion increased from $13,000 to $14,000 per donee and from $139,000 to $143,000 for gifts made to a non-citizen spouse. The threshold at which gifts receivable from foreign partnerships and corporations become reportable to the IRS also increased from $13,258 to $15,102. The threshold amount for Form 3520 (with respect to value of gifts from foreign individuals and estates) remains at $100,000.

Contact Sherayzen Law Office for Help with Your Estate and Tax Planning

If you are in the process of creating your estate and/or tax plan, contact Sherayzen Law Office for help. Our experienced estate planning tax firm will thoroughly review your case, identify available options and prepare all of the required legal and tax documents to implement your plan.

Estate Planning: Crummey Trusts

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Are you interested in reducing the amount of possible estate taxes you may have to pay? Do you desire to avoid paying gift taxes, but have concerns about gifting your children or grandchild large sums of money when they are perhaps too young to handle it responsibly? Then a Crummey Trust may be the answer for you. This article will explain the basics of Crummey Trusts and how they are usually used in estate and gift tax planning.

Gift and Estate Taxes

Typically, taxpayers who believe that they may eventually be subject to estate taxes will make lifetime gifts to their children or grandchildren. Currently, each taxpayer may give no greater than $13,000 per year per recipient, under the annual gift exclusion, and this amount will generally be excluded from gift and estate taxes. (This amount is often adjusted by the IRS for inflation). The lifetime gift tax exemption for 2011 is $5 Million.

However, the problem with outright gifts of large amounts of money to young children is obvious to many parents. Once the money is gifted, it can be difficult to control how it will be spent. Thus, often taxpayers will want a better way to reduce their estate taxes, without giving up control of how the money given will be used.

The Problem with Standard Trusts

Because of the drawbacks listed above, taxpayers may desire instead to use a standard trust. A typical trust may help reduce estate taxes, and at the same time, if set up properly, will place limitations upon how and when the money is distributed to any beneficiaries.

The problem with common trusts, however, is that the annual gift tax exclusion is only available for present interests (e.g., gifts, because they allow a recipient unfettered control of the money), and gifts made to a trust will not usually meet this legal definition because they often constitute future interests under the conditions of the trust.

The Crummey Trusts

A possible way around this predicament then is to use a “Crummey Trust”. A Crummey Trust, named for the taxpayers who first created it, allows individuals to set conditions on how and when money transferred to the trust will be distributed to beneficiaries, and at the same time gives taxpayers the ability to take the annual gift tax exclusion. A Crummey Trust also has the advantage that it can be created for multiple beneficiaries.

Under a Crummey Trust, beneficiaries to the trust are given a window period granting them the right to withdraw money from the trust as soon as the money is deposited (typically within 30 days). The right to immediate withdrawal only applies to the current amount of money gifted to the trust ($13,000 or less (following the number as adjusted by the IRS), per recipient and per year), and not any other sum of money accumulated in the trust. Under the legal case involving the original Crummey Trust, the court determined that the right to immediately withdraw the money constituted a present interest, and therefore was valid for purposes of the annual gift tax exclusion.

Thus, for the Crummey Trust purposes, it is a legal requirement that the right of withdrawal exists. If the money is not immediately withdrawn, it then remains with the trust’s funds, subject to its applicable conditions.

Taxpayers often have concerns under Crummey Trusts that young beneficiaries will decide to immediately take out the money, thus destroying the basic advantages of this type of trust. However, this potential problem is often addressed by pointing out the practical aspects of estates and by notifying beneficiaries that, if any of the money is immediately withdrawn, then that beneficiary will not receive any more money or inheritance – in a large estate, these amounts will likely far exceed the one-time $13,000 withdrawal.

The Crummey Trust can thus be a powerful tool to reduce your estate taxes, avoid gift taxes, and help fund your children’s or grandchildren’s future dreams and plans.

Contact Sherayzen Law Office for Proper Estate and Gift Tax Planning

This article can only provide a broad overview of the highly complex topic of Crummey Trusts; therefore, it should not be relied upon to determine whether this type of trusts is the best option in your particular case. For a sound legal advice with respect to estate and gift tax planning, contact Sherayzen Law Office to create the right plan for you.