The American Taxpayer Relief Act of 2012 and Resulting Estate Planning Implications

From the Trust and Estates Department of Karr Tuttle Campbell.

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (“ATRA”), forestalling the so-called impending “fiscal cliff.”  In addition to raising income tax rates on individuals with taxable income of $400,000 per year or more and increasing the top marginal rate on long-term capital gains, the Act also made permanent¹ the federal estate and gift tax exemptions and rates.
Overview of the Current Status of Federal and Washington Law

Below is a brief summary of some of the major highlights from the ATRA and Washington’s existing tax laws.  Please contact Karr Tuttle Campbell, your financial advisor, or your accountant for a more detailed explanation of these provisions and their impact on your family.

Income and Capital Gains Taxes

• The ATRA permanently extends the 2012 ordinary income tax rates for those in the 10% to 35% taxable bracket.  However, for individuals with taxable income of $400,000 or more per year, and for joint filers with a taxable income of $450,000 or more per year, the top marginal income tax rate increased to 39.6%.  This, together with the 0.9% tax imposed on high income earners under the new federal health care law, sets an effective maximum ordinary income rate of 40.5%.
• For those individuals earning more than $400,000 per year ($450,000 for joint filers), the long-term capital gains and qualified dividend rate is increased from 15% to 20%.   Thus, for high income earners (and trusts), the top capital gains rate will effectively be 23.8% when the ATRA rate is combined with the 3.8% tax on investment income imposed under the new health care law.  For those persons earning less, the rate remains 15%.
• The Alternative Minimum Tax (“AMT”) exemption was permanently indexed for inflation.
• The ATRA reinstates the itemized deduction limitation and personal exemption phase-out for individuals with an adjusted gross income over $250,000 (over $300,000 for joint filers).  The Act also extends certain tax credits for lower-income earners, such as the Earned Income Tax Credit.
• The Act allows for an individual age 70½  or older to arrange for a direct distribution to charity from the individual’s IRA, up to $100,000 per year, and to exclude the distribution from income.

Washington Estate and Gift Tax

• Washington continues to have an estate tax that applies to all estates valued at $2,000,000 or more, beginning with an applicable rate of 10% and reaching a maximum rate of 19% for estates valued at over $9,000,000.
• Legislation has been proposed that would double the maximum rate in Washington.  It is not clear at this time whether this legislation will gain any traction.
• Washington does not have a portability option for spouses.
• Washington does not have a gift tax or GST tax.

Planning Implications

The passage of the ATRA allows for a more certain planning environment (at least until the political winds change again), which means it may be a good time to move forward with those projects that have been put on hold pending the outcome of this legislation.  Now is also an opportunity to review estate planning documents to see whether updates or simplifications should be made.   This is especially true for those plans put into place prior to 2005, before the separate Washington estate tax regime was enacted.  Documents drafted before 2005 may contain tax language that would have unintended effects if not updated for the new tax laws.

In addition, because Washington does not recognize portability and has a lower estate tax threshold, some advanced tax planning may still be needed for individuals with a net worth of more than $2,000,000 and couples with a net worth of more than $4,000,000.  Washington’s lack of gift or GST tax provides unique planning opportunities for Washingtonians.  Lifetime gifting may reduce Washington estate taxes while simultaneously freezing asset values for federal estate tax purposes.  However, when making a gift, one must also consider the application of carry-over basis versus a step up in basis.

Federal estate tax planning opportunities also still exist for those persons with estates valued at over $5,000,000 ($10,000,000 for a couple).  ATRA left intact advanced planning techniques such as grantor retained annuity trusts, intentionally defective grantor trusts, family LLCs, and multi-generation dynasty trusts, which may be used (at least for now) to reduce the impact of the federal and Washington estate tax on one’s estate.  Individuals who engaged in advanced tax planning when the exemptions were significantly lower may wish to revisit whether those plans are still desired and whether any changes may be needed in that regard.

For more information about ATRA and what effect it might have on your personal estate plan, please contact any of the Karr Tuttle Campbell Tax, Trusts, and Estates attorneys, or your personal Karr Tuttle Campbell attorney, all of whom can be reached at (206) 223-1313 or by visiting the firm’s website.

¹The term “permanent” is somewhat deceptive.  The Act makes certain provisions “permanent” in the respect that such provisions are no longer set to automatically sunset after a number of years.  Tax laws, however, like all laws, are subject to change at any time as politicians come and go.

IRS Circular 230 Disclaimer:  To ensure compliance with requirements imposed by the IRS, we inform you that to the extent this communication contains advice relating to a federal tax issue, it is not intended or written to be used, and it may not be used for (i) the purpose of avoiding any penalties that may be imposed on you or any other person or entity under the Internal Revenue Code or (ii) promoting or marketing to another party any transaction or matter addressed herein.

Copyright © 2013

KARR TUTTLE CAMPBELL

Alerts are published by Karr Tuttle Campbell to present information on legal matters which may be deserving of clients’ immediate attention. The information contained in this Alert should not be regarded as legal advice or opinion, but it is attorney-client privileged.