A review of federal estate and gift tax amounts for 2013

When President Obama signed the American Taxpayer Relief Act (ATRA) in January of 2013, he ushered in a new era of federal estate and gift taxes for the country. New lifelong and yearly gift tax exclusions can help more people than ever before avoid the hassles and headaches associated with paying taxes on gifts or bequests from a loved one.

The 2013 bipartisan tax agreement puts into place a lifelong estate tax exclusion of $5.25 million per individual. This allows the transfer of millions of dollars worth of money, real estate, jewelry, cars, collectibles, etc., to others without them being on the hook for federal estate and gift taxes that can reach a staggering 40 percent.

The ATRA continues the tradition of allowing limitless transfers for charitable purposes or to one’s spouse upon death without federal tax consequences, but increases the exclusion amount for transfers going to children, other loved ones, organizations and friends.

Some highlights

The ATRA has offered clarity on some vexing issues in federal taxation circles in recent years, namely the issue of portability between spouses. Most people are aware that the law allows for each individual to exclude $5.25 million of assets from consideration for federal estate tax purposes, but not nearly as well-known is the fact that unused exclusion amounts can be carried over to a surviving spouse.

For example, if Jill and Bob are married, and Bob dies with only $3.25 million in assets, he would technically have a remaining exclusion amount of $2 million that hasn’t been used. Jill can actually claim Bob’s remaining exclusion as her own, thus giving her a combined exclusion amount of $7.25 million that can be transferred before her children and other beneficiaries are responsible for federal estate taxes.

The ATRA also includes a higher rate for annual gift tax exclusions. The federal gift tax provisions now allow for gifts of $14,000 (up from $13,000 in 2012) to be given to an individual annually without triggering tax consequences. Of course, this exclusion is separate from gifts between spouses and transfers to charities or philanthropic donations to schools or hospitals.

A key limitation

Something that the ATRA does not address is the issue of state-level estate and gift taxes. The ATRA makes no mention of these taxes because states have the right to determine their own taxation amounts. Many states have lower gift and estate tax exclusions than federal laws provide, so it is important that gifts and estate planning documents be structured in such a way as to give the greatest overall benefit to beneficiaries while still meeting the desires of the one passing along the property.

Working with an estate planning attorney with the requisite knowledge of both state and federal estate and gift taxation laws will not only protect your property while honoring your wishes, it will ensure that as many of your assets as possible get transferred to your loved ones without the need for exorbitant taxes or penalties.