The American Tax Payer Relief Act of 2012 (the “Act”), also known as the “fiscal cliff legislation,” was approved by Congress on January 1, 2013. Thankfully, this legislation eliminated much of the uncertainty regarding federal estate tax.
In 2012, the federal estate tax threshold was $5,120,000 per person (or $10,240,000 for married couples). Specifically, estates falling below this asset level were shielded from federal estate tax liability by the estate tax credit. The applicable tax rate for estates exceeding this amount was 35%. This amount was scheduled to decrease in 2013 to $1,000,000, which would have impacted many of you. (Washington State currently imposes state estate tax liability on estates exceeding $2,000,000.)
The Act fixed the problem by permanently setting the credit against the federal estate tax at $5,000,000, which will be indexed for inflation. In addition, the Act increased the tax rate to 40%.
Annual Gift Exclusion Increased to $14,000
Another change (outside of the Act) in 2013 is that the “annual exclusion amount” for gift tax purposes has increased due to indexing for inflation. You can now gift up to $14,000 to another person each year, tax free.
Washington voters recently approved Referendum 74, legalizing gay marriage. The new law took effect on December 6, 2012. If you are in gay or lesbian relationship, and/or have a Washington registered domestic partnership, the new law may significantly impact your estate planning.
Changes to Washington Registered Domestic Partnerships.
If you currently have a Washington State domestic partner, here are some key points you should know:
- If you decide to marry your partner, your domestic partnership will be dissolved on the date of your marriage.
- If both of you are younger than age 62, and you decide not to get married – your domestic partnership will be automatically converted into a marriage as of June 30, 2014. An exception exists if you’re in the process of a dissolution, annulment, or legal separation as of that date.
- If one of you is 62 years of age or older, your relationship will not automatically be converted into a marriage. You can choose whether to get married or to leave your domestic partnership as is. You should seek legal advice when making this choice, to make sure that getting married would not negatively impact you in terms of pension rights, Social Security benefits, etc.
Ability to Access Washington Marital Deduction.
As a gay or lesbian couple, if you marry, and if you have tax planning mechanisms in your Will such as a disclaimer trust or a credit shelter trust, the new law will enhance your ability to minimize or avoid Washington estate tax. However, it will not change anything concerning federal estate tax. (Stay tuned to further updates on whether future U.S. Supreme Court rulings may impact the federal marital deduction!). Specifically, prior to the passage of Referendum 74, Washington domestic partners were scheduled to be able to utilize these tax planning mechanisms, just like Washington heterosexual married couples can, as of January 1, 2014. The good news is that, if you decide to get married, these tax planning benefits are available to you right now! You don’t need to wait.
If you have any questions about these changes, and how they might impact any estate planning documents you presently have in place, please do not hesitate to contact my office. If you have friends or family who may be impacted by these changes, I would sincerely appreciate your referral.
Stacey L. Romberg
Attorney at Law