John Dubots, Financial Advisor, on 2013 Estate Tax Changes

TEMECULA, Calif. - March 25, 2013 - PRLog -- After plenty of confusion and public concern over the fiscal cliff, Congress finally enacted the American Taxpayer Relief Act of 2012 (ATRA 2012) on January 2, 2013. In many ways, the Act comes as a relief to those who were worried about the status of the gift tax, estate tax, and generation-skipping transfer (GST) tax. The $5 million gift tax and estate tax exclusion amounts, as well as the GST tax exemption, were permanently extended. The Act also permanently extended portability of the gift tax and estate tax applicable exclusion amount between spouses.  

However, ATRA 2012 also increased the rate on gift tax, estate tax, and GST tax to 40 percent in the top tax bracket. A number of provisions in the Act include:

The top rate for gift, estate, and GST taxes was originally set to increase from 2012's rate of 35% to 55% in 2013. ATRA 2012 averted this change by providing a permanent top rate of 40%, beginning in 2013.

A certain amount of property can be protected from the federal gift tax by an applicable exclusion amount. In 2012 the basic exclusion amount was set at $5,120,000 ($5 million, indexed for inflation), but was scheduled to drop to only $1 million in 2013. Under ATRA 2012 the basic exclusion amount is permanently set at $5 million, indexed for inflation.

Portability of exclusion allows a surviving spouse to utilize his or her deceased spouse's unused applicable exclusion amount, along with their own basic exclusion amount, in order to shelter property from gift and estate taxes. This provision was originally set to expire in 2013, but ATRA 2012 has permanently extended it.

The GST tax exemption allows tax payers to protect a certain amount of property from tax. The 2012 GST exemption amount of $5,120,000 ($5 million as indexed for inflation) was set to drop to $1 million (indexed for inflation) in 2013. Under ATRA 2012, this provision is permanently extended to $5 million, indexed for inflation - or $5,250,000 in 2013.

Estate or inheritance taxes – also known as “death taxes” - paid to a state could be itemized as a deduction on federal taxes in 2012, but this deduction was scheduled to change to a credit in 2013. Instead, ATRA 2012 permanently extended the deduction for these state taxes.

Qualifying conservation easements can take advantage of an estate tax exclusion. Between 2001 and 2012, this exclusion was available as long as the property was located anywhere in the United States, but this rule was set to change in 2013. Under the new rule, only properties located within a set number of miles from an Urban Nation Forest or a National Wilderness Preservation System would qualify. ATRA 2012 abolished this rule entirely, so that properties located anywhere within the United States will continue to qualify for the exclusion.

Estate tax deferrals for closely held businesses allow businesses to defer estate taxes for up to five years and then make payments over ten years at a favorable interest rate. This provision is allowed when the value of the business exceeds 35% of the value of the adjusted gross estate, and the business has 45 or fewer partners or shareholders. This rule was set to change in 2013, so that only businesses with 15 or fewer partners or shareholders could take advantage of the provision. Instead, ATRA 2012 permanently extended the original rule, and allows businesses with up to 45 partners or shareholders to continue to utilize it.

John Dubots is President and founder of Dubots Capital Management. Visit company website at http://www.jpdcapitalmanagement.com

Investment Advisory Services offered through John P. Dubots Capital Management, LLC, CA License # 0822926