June 17, 2019

The American Taxpayer Relief Act of 2012: Bidding Adieu to the Sunset (Part 3)

Editor’s Note: This is Part 3 of a 3-Part Series. For Part 1, click here, and for Part 2, click here.

By Merry H. Balson and Laurie A. Hunter

Return of the Charitable IRA Rollover Through 2013. The 2012 Tax Act extended the IRA charitable rollover rules through 2013. These rules were originally put in place in 2006, and had expired at the end of 2011. The charitable IRA rollover provisions allow individuals who are 70 ½ or older to transfer (or “rollover”) up to $100,000 per year from their IRAs to most charities on a “tax neutral” basis if the transfer is a “qualified charitable distribution” and satisfies certain rules. Qualified Charitable Distributions will not count as taxable income to the individual (as would usually be the case in any other distribution from an IRA) but no charitable income tax deduction is allowed for the contribution. Transfers must be directly from the IRA trustee to the charity to qualify. Additionally, transfers to private foundations, donor advised funds, supporting organizations or split-interest trusts (such as charitable remainder or charitable lead trusts) do not qualify for this special treatment. Because the charitable IRA rollover had expired in 2011 and has now been reinstated retroactively for 2012, taxpayers were also allowed to treat distributions from IRAs made after November 20, 2012 and before January 31, 2013 as a charitable IRA rollover for 2012, if that distribution is made in cash to charity before January 31, 2013. As a result, in 2013 taxpayers had an opportunity to give up to $200,000 to charity from their IRAs (with $100,000 treated as given in 2012) if they acted by the end of January.

Other Annual Extenders. The 2012 Tax Act also extended a number of credits and deductions that have been extended year by year for some time, and did not make them “permanent.” These include the American Opportunity Tax Credit,[1] more favorable conservation easement rules,[2] more favorable depreciation rules, the wind energy credit, and research and development credits.

Health Care Act Changes. Finally, changes taking place in 2013 include raising the medical expense deduction to 10% of adjusted gross income from 7.5%, and the new 3.8% surtax on net investment income for single taxpayers with $200,000 “modified” adjusted gross income and $250,000 for married filing jointly.

Conclusion

The 2012 Tax Act is replete with references to permanence. While that might provide comfort to some, keep in mind that the provisions of the 2012 Tax Act are only truly permanent until Congress and the President decide to change them. Until then, we can all breathe a sigh of relief that sunset never came to pass, and for the first time in decades advise our clients about the tax implications of their gifts during life and at death with some measure of certainty.

Merry H. Balson is Of Counsel at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, estate and trust administration and forming and advising exempt organizations. She can be reached at mbalson@wadeash.com or 303-329-2215.

Laurie A. Hunter is a Shareholder at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, probate and trust administration. She can be reached at lhunter@wadeash.com or 303-329-2227.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] Pub.L. 112-240, Sec. 103, H.R. 8, 126 Stat. 2313 (2013).

[2] Pub.L. 112-240, Sec. 206, H.R. 8, 126 Stat. 2313 (2013).

The American Taxpayer Relief Act of 2012: Bidding Adieu to the Sunset (Part 2)

Editor’s Note: This is Part 2 of a 3-Part series. Click here for Part 1.

By Merry H. Balson and Laurie A. Hunter

How does the 2012 Tax Act affect estate planning?

Lifetime Gifts. Many clients who were concerned that sunset would cause the estate tax exemption to decrease from $5 million to $1 million made gifts before the end of 2012 to use all or part of the $5 million exemption. Those who did not make end of year gifts in 2012 (and those who did but did not fully use their exemption equivalent) are given another chance to make such gifts because the historically high exemptions are still in effect. Completed irrevocable gifts can remove future appreciation from the donors’ estates, as well as give trust beneficiaries other benefits of irrevocable trusts generally, such as creditor protection and protection from claims of divorcing spouses (in certain circumstances). In addition, if only one spouse made a gift to an irrevocable trust for the benefit of the other spouse, but because of the “reciprocal trust rule” the other spouse did not make a similar gift, that spouse may now wish to consider, after the passage of time, making a gift of their own.

Keep in mind that the downside of making gifts still applies: no stepped up basis on death. Instead, the gifted assets have a “carryover basis” from the donor.

Continued Use of Family or Credit Shelter Trusts. There are a number of reasons an estate planner should continue to discuss the use of family trusts or credit shelter trusts in estate plans instead of relying solely on portability of the first spouse’s unused exemption. First, future appreciation of assets in the family trust will pass estate tax free. Second, income from the family trust can accumulate outside the surviving spouse’s estate. Third, the family trust can be designed to provide creditor protection for the surviving spouse. Fourth, assets in the family trust can avoid claims of a new spouse to the trust assets either at the surviving spouse’s death or divorce. Finally, the family trust can provide a vehicle for an independent trustee to administer the assets, especially in the case of a blended family.

Addressing Portability Election in Planning Documents. With the permanence of portability, practitioners who are not already doing so should consider the extent to which the portability election should be addressed in wills and trusts. The documents could require the personal representative to elect portability on a timely filed estate tax return or could merely authorize the personal representative to do so. Additionally, consider addressing who should bear the cost of the estate return preparation, particularly where the return is being filed solely to elect portability. Furthermore, issues relating to the portability election may also be a subject for negotiation in premarital or postmaritial agreements.

Income Tax Changes in the 2012 Tax Act. In addition to the estate and gift tax provisions, there are numerous income tax provisions in the 2012 Tax Act. The following is a summary of some of those provisions affecting individuals:

  • Tax rates stay the same for most taxpayers. Individuals will have an increased tax rate (back to Clinton-era rates) if they have taxable income over $400,000, and married filing jointly taxable income is over $450,000. The top tax rate will be 39.6%.[1]
  • Payroll tax rate returns to 2010 level. The 2% reduction in the social security payroll tax has expired.[2] Withholding will increase for all taxpayers back to the 2010 level.
  • Long-Term Capital Gains rates stay at 0% (for 10% and 15% rate taxpayers) and 15% (for up to 35% rate taxpayers). For those in the new 39.6% rate, the capital gain rate will be 20%.[3] Qualified dividend rates stay at the same rates as long-term capital gains.[4]
  • Alternative Minimum Tax changes are made “permanent” so that the income levels are $50,600 for single taxpayers and $78,750 for married filing jointly, and these levels are indexed for inflation.[5] Previously, these changes had to be adopted every year.
  • Personal exemptions will be reduced because the suspended phaseout is again in effect. For $250,000 single taxpayers or for $300,000 for married filing jointly, the personal exemption will be reduced by 2% for each $2,500 over the threshold.[6] These levels will be adjusted for inflation.
  • The limits on itemized deductions that had been suspended will again apply so that for the same threshold for the personal exemption levels discussed above, the total amount of itemized deductions will be reduced by 3% of the amount by which the taxpayer’s income exceeds the threshold, but not more than 80%.[7]
  • Trusts and Estates reach the highest tax rate (now 39.6%) at roughly $12,000 in taxable income, so trusts in particular may be subject to the higher income tax rate, the higher capital gains rate and the new 3.8% surtax on investment income mentioned below.[8]

To be continued…

Merry H. Balson is Of Counsel at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, estate and trust administration and forming and advising exempt organizations. She can be reached at mbalson@wadeash.com or 303-329-2215.

Laurie A. Hunter is a Shareholder at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, probate and trust administration. She can be reached at lhunter@wadeash.com or 303-329-2227.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] Rev. Proc. 2013-15, Sec. 1.01, 2013-5 IRS 444 (January 11, 2013).

[2] Pub.L. 112-240, Sec. 101 (a-b), H.R. 8, 126 Stat. 2313 (2013).

[3] Pub.L. 112-240, Sec. 102(b), H.R. 8, 126 Stat. 2313 (2013).

[4] Pub.L. 112-240, Sec. 102(a), H.R. 8, 126 Stat. 2313 (2013).

[5] Pub.L. 112-240, Sec. 104, H.R. 8, 126 Stat. 2313 (2013).

[6] Pub.L. 112-240, Sec. 101(b), H.R. 8, 126 Stat. 2313 (2013).

[7] Id.

[8] Id.

The American Taxpayer Relief Act of 2012: Bidding Adieu to the Sunset

Editor’s Note: This is Part 1 of a series. Stay tuned for Parts 2 and 3.

By Merry H. Balson and Laurie A. Hunter

On January 1, 2013, while the ink on many year-end gift tax transfers was still wet, the 112th Congress passed the American Taxpayer Relief Act of 2012 (the “2012 Tax Act”).[1] The 2012 Tax Act was signed into law the following day, ending more than a decade of estate and gift tax uncertainty. This article summarizes the estate and gift tax provisions of the 2012 Tax Act, discusses the Act’s impact on estate planning, and outlines select income tax provisions affecting planning for individuals.

Phase-Ins and Sunsets: A Brief History of the Federal Estate, Gift and Generation-Skipping Transfer Tax System

The federal tax on transfers at death has been in existence since 1916 and the tax on inter vivos gifts has been part of the federal tax system since 1924, with the exception of a brief hiatus during its repeal between 1926 and 1932.[2] Phased in changes to the unified credit against estate and gift taxes and applicable transfer tax rates have been part of the estate planning practice for over three decades. In 1976, with the passage of the Tax Reform Act (“TRA”) of 1976, Congress created a unified estate and gift tax system and added the generation skipping transfer tax (“GST”).[3] It also phased in increases in the estate tax exemption from $60,000 in 1976 to $175,000 in 1981. The Economic Recovery Tax Act of 1981 (“ERTA”), among many other things, phased in increasing unified credit amounts over six years, increasing exemption equivalent amounts from $175,625 to $600,000 by 1987.[4] The top estate tax rate under ERTA was reduced to 55%, down from a maximum tax rate of 70% prior to enactment. Similarly, the Taxpayer Relief Act of 1997 provided for a phased in exemption equivalent from $600,000 to $1,000,000 in 2006.[5] The TRA ‘97 phase in never fully took effect because in 2001, when the exemption was only $675,000 and the estate and gift tax rate remained at 55% (plus 5% for estates over $10,000,000), the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) of 2001 changed the estate and gift tax unified credit and rates yet again.[6] EGTRRA increased the exemption equivalent to $1,000,000 in 2002 and then incrementally through 2009 to $3,500,000, maintaining the gift tax exemption at a flat $1,000,000, decreasing the top rate to 45% by 2009 (which was subsequently accelerated to 2007), repealing the estate and gift tax in 2010 (but a carry-over basis regime) and sunsetting all EGTRRA provisions on January 1, 2011, with the effect of reverting to the law as it existed on January 1, 2001.[7] At the end of 2010, after nearly a year of estate and gift tax repeal, Congress passed the taxpayer friendly Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”).[8] The 2010 Tax Act extended EGTRRA’s sunset provisions for two additional years (through January 1, 2013), increased the exemption equivalents to $5,000,000 for estate and gift tax (indexed for inflation starting in 2012) and reduced the tax rate to 35%.[9] The 2010 Tax Act also introduced the concept of “portability,” whereby a surviving spouse could “port” or use his or her deceased spouse’s unused unified credit provided certain conditions were satisfied.[10]

Finally a “Permanent” Tax Bill? After 12 years of planning under a looming sunset, finally there is no automatic sunset date for the 2012 Tax Act (although as noted below, certain extenders are set to expire). The major estate planning provisions include the following:

  • The estate and gift tax exemptions remain unified, and will stay at $5 million, but will be indexed for inflation. For 2013, both exemptions are $5,250,000.[11]
  • The GST exemption will also stay at $5 million, again, as indexed for inflation. The GST exemption is also $5,250,000 for 2013.[12]
  • Portability is permanent.[13] A deceased spouse’s unused estate tax exemption is “portable” if the surviving spouse timely files a U.S. Estate Tax Return (form 706). With certain exceptions, portability allows the surviving spouse to use the deceased spouse’s unused estate tax exemption immediately in addition to their own exemption. Importantly, however, the GST exemption is not portable and any unused portion at the first spouse’s death is lost. The 2012 Tax Act also corrected a technical problem in the 2010 Tax Act to be consistent with Treasury Regulations issued last summer that were favorable to the taxpayer by permitting “tacking on” of more than one former deceased spouse’s unused exemption to the surviving spouse.
  • Gift, estate and GST tax rate increases to 40% on the amount over the exemption.[14] The rate was 35% in 2011 and 2012, but had been 45% in 2009.

Additional effects of the repeal of the EGTRRA Sunset. The result of finally repealing the looming sunset provisions of EGTRRA and the strange results from it disappearing “as if it had never been enacted,” are among the following:

  • QFOBI is truly gone. The Qualified Family Owned Business Interest deduction, a complicated estate tax deduction that had no effect after 2003 due to the increase in estate tax exemptions, is now permanently repealed.
  • The state death tax credit was converted to a deduction, and now stays that way. For Colorado and about half the states, this means no state death tax, but the other half of the states changed their laws to include a state inheritance or estate tax, so continue to check local laws if your clients own real estate outside Colorado.
  • GST automatic allocation rules[15] and GST qualified severance rules both remain in effect.[16] These taxpayer-friendly rules are now permanent.

This is Part 1 of a 3-part series. Stay tuned for parts 2 and 3.

 

Merry H. Balson is Of Counsel at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, estate and trust administration and forming and advising exempt organizations. She can be reached at mbalson@wadeash.com or 303-329-2215.

Laurie A. Hunter is a Shareholder at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, probate and trust administration. She can be reached at lhunter@wadeash.com or 303-329-2227.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] Pub.L. 112-240, H.R. 8, 126 Stat. 2313 (2013).

[2] The estate tax was enacted by the Revenue Act of 1916 (39 Stat. 756). The gift tax was first put in place by the Revenue Act of 1924 (43 Stat. 253), repealed by the Revenue Act of 1926 (44 Stat. 9), then reenacted by the Revenue Act of 1932 (47 Stat. 169).

[3] Pub. L. 94-455, H.R. 10612, 90 Stat. 1520 (1976).

[4] Pub. L. 97-34, H.R. 4242, 95 Stat. 172 (1981).

[5] Pub. L. 105-34, H.R. 2014, 111 Stat. 787 (1997).

[6] Pub. L. 107-16, H.R. 1836, 115 Stat. 38 (2001).

[7] See Sec. 901, Sunset Provisions of EGTRRA.

[8] Pub. L. 111-312, Title III, H.R. 4853, 124 Stat. 3296 (2010).

[9] Id.

[10] Id., Sec. 303.

[11] Rev. Proc. 2013-15, Sec. 2.13, 2013-5 IRS 444 (January 11, 2013).

[12] Under I.R.C. Sec. 2631(c), the GST exemption is equal to the basic estate tax exclusion amount.

[13] Pub.L. 112-240, Sec 101, H.R. 8, 126 Stat. 2313 (2013).

[14] Id. at Sec 101(c).

[15] See I.R.C. Sec. 2632(b-c) for deemed GST allocation rules.

[16] See I.R.C. Sec 2642(a)(3) for qualified severance rules.