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Estate Tax Planning in Rocklin, CA


Historically speaking, the federal estate tax is an excise tax levied on the transfer of a person's assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize federal estate taxes is both a prudent and an important aspect of comprehensive estate planning.

The most recent iteration of the federal estate tax was signed into law on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA). There are a few things you ought to know about this law, as regarding your estate planning. Specifically, you should know the "numbers" governing transfers subject to estate, gift and generation-skipping transfer taxation.

Federal Estate Tax Exemption

The $5 million exemption signed into law on December 17, 2010, under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (TRA 2010), is now permanent, as indexed for inflation. Accordingly, the federal estate tax exemption for 2013 is $5.25 million (and a nearly "automatic"* $10.50 for married couples who follow very specific requirements at the death of the first spouse).

Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption

The new law continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you utilize your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2013 is $5.25, as indexed for inflation. Note: Gifts made within your annual gift exclusion amount do not count against your lifetime limit.

The annual gift exclusion is currently $14,000. (That is an inflation-adjusted increase from $13,000 in 2012.) Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $28,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect "gift-splitting" for the tax year in which such gift was made.

Generation-Skipping Transfer Tax Exemption

The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $5.25 million, as indexed for inflation. Likewise, the top tax rate is 40%.

So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild, or from an individual to another unrelated individual who is more than 37.5 years younger than the tranferror.

Properly done, this can transfer significant wealth between generations.

"Portability"

The new law, ATRA 2012, makes "permanent" a new concept in estate planning for married couples, ostensibly rendering unnecessary traditional estate tax planning. This concept, called "portability," means that a surviving spouse can essentially inherit the estate tax exemption of the deceased spouse without use of "A-B Trust" planning. As with most tax laws, however, the devil is in the details. For example, unless the surviving spouse files a timely (within nine months of death) Form 709 Estate Tax Return and complies with other requirements, the portability may be unavailable.

In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use "portability" as the means to secure their respective estate tax exemptions. Furthermore, reliance on "portability" in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.

If you are concerned about how your current estate and gift planning may function in light of ATRA 2013, and thereafter, then we encourage you to schedule a consultation.

California Estate Taxes

California's estate tax system is commonly referred to as a "pick up" tax. This is because California picks up all or a portion of the credit for state death taxes allowed on the federal estate tax return (federal form 706 or 706NA). Since there is no longer a federal credit for state estate taxes on the federal estate tax return, there is no longer basis for the California estate tax. California has neither an estate tax – a tax paid by the estate, nor an inheritance tax – a tax paid by a recipient of a gift from an estate.

Elise Baker is an estate planning attorney located in Rocklin, California. She focuses her practice on Estate Wills & Trusts, Probate Avoidance Strategies, Probate & Trust Administration, Same-Sex/Couples & Non-Traditional Families, Planning for LGBT's, Planning for Minors & Children, and Guardianships. She also helps individuals and families with Revocable Living Trusts, Powers of Attorney, Health Care Directives, Conservatorships, Document Reviews, Charitable Planning and Gifting, Special Needs Planning, Estate Tax Planning, and Small/Family Business Succession. Elise has offices in Rocklin, California, but she also serves clients in Roseville and Lincoln, and many other cities surrounding Rocklin and Sacramento.

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