Recent passage of the American Taxpayer Relief Act of 2012 has made permanent the $5 million tax-free amount that each person can give to family and friends during lifetime or through their estate without owing any gift or estate taxes. The $5 million base amount will be indexed for inflation each year. For 2013, the tax-free amount is $5,250,000.
Above the tax-free amount, gift/estate taxes of up to 40 percent are owed on gifts to family members (except spouses) and friends.
For a married couple, if one person's estate cannot use the full $5.25 million (or the current amount in effect at the time), the balance is "portable" and is available to the surviving spouse to use.
This means that the great majority of Americans do not have to be concerned about those taxes and can give away more during lifetime as well. Previous laws had restricted the total of lifetime giving to family and friends.
As in the past, all assets transferred to a spouse are tax-free, but it may not make sense to "bunch up" significant assets in only one person's estate. Instead, the use of trusts can assure tax-efficient results, especially for couples with assets in excess of $10.5 million.
Many choose to give portions of their estate to grandchildren and skip the taxation that would occur when a child inherits the funds first. The generation-skipping transfer tax which made doing that an expensive direction earlier is now also effective only after exceeding the $5.25 million level of assets.
As in the past, charitable support can be carried out through a will or revocable trust and earn a tax deduction for the estate. For lifetime charitable giving, those who are age 70 1/2 and older and have funds in IRAs can make direct transfers of up to $100,000 during 2013 to qualified nonprofit organizations. Such transfers avoid income taxes and satisfy the required minimum distribution for 2013.
While estate taxes have become less of an issue, it still makes sense to take the time to set up an estate plan to provide control of the assets in the way you feel is important. The laws that govern when a person dies without a will cannot provide the same result.
Although it can take time to establish everything needed for your estate plan, the effort can benefit you during your lifetime through getting financial and medical powers of attorney finalized for use as needed.
That's good planning.
Deborah Miller is the director of planned giving for the West Virginia Foundation.