Winter 2013: Fiscal Cliff Avoided (?)

As everyone will recall, the federal government, in a last minute scramble, avoided its self-created fiscal cliff at the beginning of 2013 by passing sweeping new legislation, the American Taxpayer Relief Act of 2012. The commonly reported aspects of the new law are the individual income tax rate increases, the end of the 2% social security “holiday”, and the extension of certain education-related tax incentives.

One other area addressed, in a significant way, was the taxation of gifts and estates. In 2012, the federal gift and estate tax exemption – the amount one could transfer to others, such as family members – was $5,120,000.00. The relatively high federal gift and estate tax exemption, together with the fact that Massachusetts does not impose a tax on lifetime gifting, and the potential looming decrease in the federal exemption that was to take effect on January 1, 2013, provided a unique window of opportunity for gift planning.

As enacted, the new tax law, which became effective on January 1st, permanently (or at least until Congress re-visits this issue) keeps the federal exemption level at $5 million (indexed for inflation), and increases the top estate, and gift tax rate from 35% to 40%. The bill also continues the so-called portability feature, which was introduced in 2010, allowing a deceased spouse’s estate to transfer his or her unused exclusion to the surviving spouse.

One area that was not changed by the new tax law is the Massachusetts estate tax. More specifically, under current law, as has been the case since 2004, estates valued in excess of $1 million may be subject to Massachusetts estate tax. Although the rates are significantly lower than the federal estate tax rates, the lower threshold means that a greater number of estates are impacted.