2013 Tax Law Changes Warrant a Review of Your Estate Plan

The American Taxpayer Relief Act of 2012 (ATRA), signed into law Jan. 2, primarily addresses income taxes. But it also provides substantial estate tax relief compared to the changes that otherwise would have gone into effect in 2013. In addition, it provides increased estate tax law certainty. Nevertheless, ATRA isn’t all positive for estate planning: It increases the estate tax rate compared to the 2012 estate tax law regime.

The many changes going into effect in 2013 warrant a review of your estate plan. Here are some of the most important changes to consider.

Exemptions and rates

Without congressional action, gift, estate and generation-skipping transfer (GST) tax exemptions would have dropped precipitously (by more than $4 million) and the top rates would have jumped significantly (by 20 percentage points) beginning in 2013. ATRA increases transfer taxes for some families, but much less dramatically: It retains the 2012 $5.12 million exemptions —indexing them for inflation— and increases the top rates by five percentage points, to 40%.

The changes are permanent, which, despite the rate increases, will be welcome news to many taxpayers. The exemptions remain at an all-time high level and will keep up with inflation for future years. This means that, even if you used up your exemptions in 2012 to lock them in, you’ll still have some more exemption available in future years. In addition, the top rate, though higher than it was in 2012, is still quite low historically.

It’s important to review your estate plan in light of these changes. Doing so will allow you to make the most of available exemptions and ensure your assets will be distributed according to your wishes. Without a review, it’s possible the exemption and rate changes could have unintended consequences on your estate plan.

Exemption portability

Legislation in 2010 included a provision that — temporarily — provided significant estate planning flexibility to married couples. If one spouse died in 2011 or 2012 and part (or all) of his or her estate tax exemption was unused at his or her death, the estate could elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption.

This relief was somewhat hollow in most cases, however, because it applied only if the surviving spouse made gifts using the exemption or died by the end of 2012. ATRA has made the portability provision permanent.

Making asset transfers between spouses during life and/or setting up certain trusts at death can produce similar results to portability. But making the portability election is much simpler and provides flexibility if sufficient planning hasn’t been done before the first spouse’s death.

Still, using lifetime asset transfers and trusts can provide benefits that exemption portability doesn’t offer. For example, portability doesn’t protect future growth on assets from estate tax as effectively as applying the exemption to a credit shelter trust does.

Also be aware that the provision doesn’t allow the deceased spouse’s remaining GST tax exemption to be used by the surviving spouse. In addition, some states don’t recognize exemption portability.

Other provisions

ATRA preserves several other provisions that affect estate planning, including:

    • The federal estate tax deduction (rather than a credit) for state estate taxes paid,
    • Deferral and installment payment of estate taxes attributable to qualified closely held business

       interests, and
    • GST tax protections, including deemed and retroactive allocation of GST tax exemptions, relief

       for late allocations, and the ability to sever trusts for GST tax purposes.

Certain income tax provisions can also be beneficial for estate planning purposes. For example, ATRA makes it easier to convert an existing traditional 401(k), 403(b) or 457(b) account into a Roth account. Roth accounts can be attractive from an estate planning perspective because they don’t require you to take distributions during your life, allowing you to let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

Charitable giving breaks

ATRA also extends two valuable charitable giving breaks through 2013 that might help you achieve your estate planning goals if you’re charitably inclined. The breaks had expired Dec. 31, 2011, and the extensions are retroactive to Jan. 1, 2012:

1. Tax-free IRA distributions for charitable purposes. If you’re age 70½ or older, you can make a direct contribution from your IRA to a qualified charitable organization without owing any income tax on the distribution. If you’re subject to required minimum distributions (RMDs), the contribution can be used to satisfy that requirement. The maximum allowable distribution for charitable contribution purposes is $100,000 per tax year.

To help taxpayers take advantage of the 2012 revival, ATRA allows a direct charitable contribution made in January 2013 to be considered for tax (including RMD) purposes to have been made Dec. 31, 2012. And if you took an IRA distribution in December 2012 and contribute it to charity in January 2013, the “direct contribution” requirement is waived; you can contribute the distribution to a qualified charity in January 2013 and treat it as a 2012 direct charitable contribution, provided the other requirements are met.

2. Contributions of capital gains real property for conservation purposes. You can make such a contribution and take a larger deduction than is allowed for most other capital gains property contributions. Specifically, your deduction for a contribution of capital gains real property for conservation purposes generally can be up to 50% of your adjusted gross income (AGI) rather than the 30% of AGI limit that normally applies to contributions of capital gains property.

Increased estate tax law certainty

One of the most beneficial aspects of ATRA’s estate tax provisions is their permanence. For more than a decade, much uncertainty due to expiring exemptions and rates had made estate planning a challenge. The fact that rates, exemptions and other estate-tax-related breaks under ATRA won’t expire will make it easier to determine how to make the most of your exemptions and keep taxes to a minimum while achieving your other estate planning goals.

Of course, just because the provisions don’t expire doesn’t mean legislation couldn’t be signed into law in the future that would change exemptions, rates or breaks — or even repeal the estate tax. There are still many who support an estate tax repeal. But a repeal is probably unlikely for at least the next four years, given the current balance of power in Washington and concerns about deficit reduction. Nevertheless, it’s always a good idea to build flexibility into an estate plan that will allow it to adapt to changing circumstances.

Many reasons for a plan review

The 2013 estate tax law changes aren’t the only reason to review your estate plan. For example, the state estate tax continues to be a consideration. If you live in a state with an estate tax, the exemption amount could be dramatically different from the federal exemption amount. Improper planning could lead to an unpleasant surprise in the form of significant state estate tax liability. Further complicating matters is that, even if your state doesn’t have an estate tax, it’s possible you may be subject to estate tax in other states in which you own property.

Changes in your personal situation may also require a change in your estate plan. Births, deaths, marriages and divorces can all have an impact. So can changes in your personal finances or your business.

So to ensure that you minimize your tax liability and that your assets will be distributed according to your wishes, you need to review your estate plan now. We’d be pleased to help you determine how ATRA and other changes will impact your estate plan and what plan revisions can help you achieve your goals.

he American Taxpayer Relief Act of 2012 (ATRA) extends and enhances many breaks for businesses. In particular, it provides incentives for businesses to invest in assets, research and people. Here’s an overview of ATRA’s most important changes for businesses, along with the implications for 2012 tax returns and tax planning for 2013 and beyond.

Bonus depreciation

ATRA extends 50% bonus depreciation — an additional first-year depreciation allowance — generally through 2013. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property.

ATRA also extends the provision allowing corporations to accelerate certain credits in lieu of claiming bonus depreciation for qualified assets placed in service through Dec. 31, 2013 (Dec. 31, 2014, for certain long-lived and transportation property).

Be sure to consider whether you made any asset purchases that might qualify for 50% bonus depreciation on your 2012 tax return. And if you’re anticipating major asset purchases in the next year or two, you may want to time them so you can benefit from 50% bonus depreciation. But also consider whether you qualify for Section 179 expensing, which may provide a greater tax benefit.

Sec. 179 expensing

Sec. 179 is another tax law provision that encourages investment. It allows smaller businesses to immediately write off the full price of qualifying asset purchases rather than depreciating them over several years. The deduction is reduced by $1 for every $1 of expenses in excess of a phaseout threshold, which is why the break primarily benefits smaller businesses. The expensing election can be claimed only to offset net income, not to reduce net income below zero.

Before ATRA, the Sec. 179 expensing limit for 2012 was $125,000, with a phaseout threshold of $500,000 — and these amounts were scheduled to drop to $25,000 and $200,000, respectively, for 2013. ATRA increases these amounts for assets placed in service in both years to $500,000 and $2 million, respectively (the same amounts that applied in 2010 and 2011).

If you’re eligible for full Sec. 179 expensing, it may provide a greater benefit than bonus depreciation because it can allow you to deduct 100% of an asset acquisition’s cost. Plus, only Sec. 179 expensing is available for used property. However, bonus depreciation may benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement. You’ll also want to consider state tax consequences.

Leasehold-improvement, restaurant and retail-improvement property

For 2009 through 2011, accelerated depreciation was available for qualified leasehold-improvement, restaurant and retail-improvement property. ATRA extends it to 2012 and 2013. Specifically, the provision allows a shortened recovery period of 15 years — rather than 39 years — for such property.

Consider whether you made asset purchases that might qualify for accelerated depreciation on your 2012 tax return. And if you’re thinking about making such investments in the future, you may want to do so in 2013 to ensure you can take advantage of this break if it’s not extended again.

Research credit

For many years, the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has provided an incentive for businesses to increase their investments in research. But the credit expired at the end of 2011.

ATRA extends the credit to 2012 and 2013. The credit is generally equal to a portion of qualified research expenses. It’s complicated to calculate, but the tax savings can be substantial.

Work Opportunity credit

The Work Opportunity credit, designed to encourage hiring from certain disadvantaged groups, expired Dec. 31, 2011, for most groups. An expanded credit for qualifying veterans expired Dec. 31, 2012. ATRA extends the credit for most eligible groups through 2013.

Examples of disadvantaged groups for purposes of the credit include food stamp recipients, ex-felons and nondisabled veterans who’ve been unemployed for four weeks or more, but less than six months. For these groups, the credit generally equals 40% of the first $6,000 of wages paid to qualifying employees, for a maximum credit of $2,400. A larger credit of up to $4,800 is generally available for hiring disabled veterans. And, if you’re hiring veterans who’ve been unemployed for six months or more in the preceding year, the maximum credits are even greater:

• $5,600 for nondisabled veterans, and
• $9,600 for disabled veterans.

If you’re considering making new hires, and workers from one or more of these disadvantaged groups might meet your needs, making the hires before the end of 2013 may be beneficial from a tax perspective. And be sure to check to see if you qualify for the credit on your 2012 tax return.

Transit benefits

Some fringe benefits aren’t included in an employee’s wages for income and payroll tax purposes, yet the employer is still allowed to deduct them. Generally, the maximum transit benefit that could receive such treatment has been higher for parking than for van-pooling and mass transit.

Tax legislation in 2009, however, provided for the limits to be equal through 2010. Legislation in 2010 extended this parity through 2011. ATRA has extended it through 2013. For 2012 and 2013, the limits are both now $240 per month, though there’s been some discussion about increasing the 2013 amount. If you offer transit benefits, keep parity in mind for your 2013 program.

Flow-through entities

ATRA does have a downside for businesses structured as flow-through entities: Because their income flows through to the owners’ tax returns, entities such as partnerships, limited liability companies (LLCs) and S corporations will in a sense be affected by ATRA’s changes to ordinary-income tax rates for individuals. So, if you’re the owner of such an entity and will face the 39.6% rate, traditional income and deduction timing strategies may help you minimize the impact, or at least defer taxes.

You also may want to consider converting your business to a C corporation, because the top corporate rate remains at 35%. But there are many other tax and nontax consequences of a conversion, so it’s important to discuss the impact with your tax advisor as well as your attorney before implementing such a change.

Which breaks will benefit your business?

ATRA also extends many other business tax breaks that are too limited in applicability to cover here but that can provide significant benefits to the taxpayers who qualify for them. Please contact us to learn which ATRA breaks may apply to you.