By Roberta M. Gubbins
Legal News
“The big result of the law as passed,” said Gregory Walthorn, CPA, opening the discussion of the tax implications of the American Taxpayer Relief Act (ATRA) of 2012, “is that for a large chunk of people, tax impacts of the estate tax law are no longer a primary concern.”
However, he said, speaking before the Ingham County Bar Association Probate Section on January 15th,“estate tax planning for the ultra-wealthy with estates of ten million and up is now more important. For both of those groups of people, now that the law is permanent, it is a good time for them to consult their advisors for planning.”
The event was held at the State Bar of Michigan.
Under the new law, Walthorn said, “planning is much more difficult with each piece having its own threshold. We haven’t made it any easier.”
“The maximum federal estate tax is now locked in at 40%,” said Katie Hamilton, CPA, Plante Moran, “for those dying after December 31st 2012. The exclusion amount begins at five million and is indexed for inflation.”
Other adjustments to the federal estate tax include:
• A deduction, rather than a credit, for state estate taxes
• Portability between spouses is maintained and permanent.
• A federal tax rate for 40% for gifts made after December 31, 2012
• The annual gifting exclusion is increased to $14,000 per donee.
Hamilton recommended that, due to the changes in the law, the following questions should be asked of your clients considering gifting:
1. Do you have a desire to transfer anything to anybody?
2. Do you think that you will have a taxable estate?
3. Do you feel you can afford to make gifts?
“The basic planning principles haven’t changed,” she said. The 40% rate is better than the 55% rate it could have been.”
Things that are still on the horizon for the tax code, she added, include eliminating marketability and minority interest discounts, establishing a minimum ten-year term on Grantor Retained Annuity Trusts and eliminating intentionally defective grantor trusts.
In the future, said Hamilton, “income tax planning may become more important than estate tax planning for many people.” The increased capital gain tax rate and Medicare sur-tax may alter some strategies and it is “important to focus on the minimization of combined trust and individual tax liability where flexibility exits.”
Hamilton discussed the Health Care Reform provisions of the act, which focus on earned income and include two basic points:
1. A .9% tax on earned income for Medicare
2. A 3.8 % Medicare surtax on net investment income on individuals, estates and trusts that are over the threshold amounts.
“The most important part of the American Taxpayer Relief Act of 2012 is the tax rate increase on high-income earners, which is now 39.6%,” said Hamilton. “The second most important part is the increased tax rate on capital gains and ordinary dividends to 20%. Regarding trusts, with the Medicare sur-tax, this rate can be boosted as high as 23.8%.” The question is whether to distribute or not, because the trust rate is high.
Hamilton concluded with the statement “that estate planning is not always about taxes. It’s about the non-tax issues of the clients. We want to offer information on how they can design their estate plan to meet non-tax objectives such as family harmony. Asking them ‘what is it you want to achieve?’ could be helpful.”
The next Probate Section meeting will be February 19th at noon at the State Bar of Michigan. There will be a panel discussion of real estate issues headed by Jeff Hicks. While reservations are not necessary, please e-mail Marlaine Teahan (mteah@fraserlawfirm.com) if you are attending so that there will be enough materials.
Katie Hamilton, CPA, from the Plante Moran Wealth Management Industry Group. Hamilton is an Associate with the firm in the Tax Services Group, specializing in income tax planning for high net-worth individuals. Both her BA and Master Degrees are in accounting from Michigan State University.
Gregory Walthorn, also from Plante Moran Financial Advisors, is a Relationship Manager, specializing in wealth management for high net-worth individuals. Walthorn has a BA and a Master’s Degree in accounting from MSU.
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