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Estate Planning Tips: 2013 Tax Changes

14 December 2012 admin 3,154 views No Comment Email This Post Email This Post Print This Post Print This Post

Ernest D. Sillers Legacy Society

The following information is provided for your benefit by the St. Margaret’s Planned Giving Committee.

By Megan G. Mayer, Chair, Planned Giving Committee

If you are wondering what 2013 will bring to your tax world, you are certainly not alone. Ask your accountant or attorney? They don’t know either. While we know what the default plan is if congress does not pass a change, no one expects the default plan to become the real plan. Yet, since this default plan is the only definite plan for the moment, we provide this brief analysis for your benefit. Below is a summary of income and estate planning changes that will take effect on January 1, 2013 in absence of congressional action.

Income Tax Changes

In 2013, the maximum income tax rate will rise from 35 percent to 39.6 percent, while the rate on capital gains tax will rise from 15 percent to 20 percent. Dividends will once again be taxed as ordinary income. Also, a 3.8 percent Medicare contribution tax on unearned income in excess of $200,000 ($250,000 for joint filers) begins in 2013. An additional .9 percent Medicare tax on earned income in excess of $200,000 ($250,000 for joint filers) will apply. These federal changes are on top of the California changes voters just enacted with Proposition 30, applying to 2012 income. Prop. 30 increases the maximum income tax rate to 13.3 percent, and increases multiple lower bracketed rates, which, according to the California Franchise Tax Board, will in all affect the top 3 percent of California taxpayers.

Estate Tax Changes

The Temporary Estate Tax Relief of 2010 revived the estate tax at a top rate of 35 percent, and brought the estate tax exemption amount to what is now $5.12 million, while aligning rates and exclusion amounts for gift and generation skipping taxes. The 2010 changes also introduced the concept of “portability” whereby one could transfer a decedent’s exemption amount to the surviving spouse or domestic partner, with some limitations. This brought into question whether the common bypass trust served a purpose for most estate plans, since one of the main purposes of a bypass trust is to maximize the use of exemption amounts between spouses.

Without congressional action, the estate tax exemption amount will, in 2013, decrease from $5.12 million ($10.24 million per couple) to $1 million ($2 million per couple). The maximum estate tax rate will increase from 35 percent to 55 percent. Likewise the gift tax exclusion will decrease to $1 million and maximum tax rate increase to 55 percent. The lower exclusion amount and the higher tax rate in 2013 have prompted many to expedite their gifting so that it occurs in 2012.

Charitable deductions are not set to change automatically in 2013, but may become part of a Congressional modification of the estate planning tax structure. Under the present scenario, a gift to charity in 2012 will provide favorable tax benefits. Also, giving publicly traded stock rather than cash is very tax-effective. If you have owned the stock for more than one year, you may deduct the fair market value (an average of high and low prices on the date of transfer) on the stock without having to pay capital gains on the appreciation. Again, these transactions need to be completed by December 31, 2012 to secure a charitable deduction on your 2012 return.

“No Contest” Clauses

Another change in 2010, though not involving taxes, involved “No Contest Clauses,” limiting their enforcement against beneficiaries and possibly invalidating many such clauses. The new restrictions apply to any instrument becoming irrevocable after January 1, 2001. Since most revocable trusts become irrevocable upon the trustor’s death, this change applies to many trusts. Be sure to ask your estate planner whether your trust warrants review given this change.

While we know what the default tax scenario is, we do not know what income or estate tax changes may come as a result of the current congressional debate. President Obama has proposed using the 2009 estate tax scenario of a $3.5 million exemption and 35 percent maximum estate tax rate. We also do not yet know if congress will maintain the portability of these exemptions. Be sure to follow news releases and consult your legal and tax experts for the most current status of these events.

Should you wish to consider St. Margaret’s in your own estate plan, or have any questions about planned giving, please contact Director of Advancement Lara Farhadi at lara.farhadi@smes.org or 949.661.0108, ext. 353.




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