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In January 2013, Congress passed the American Taxpayer Relief Act of 2012. The act made permanent many of the “Bush-era” tax cuts for low- and middle-income individuals, as well as making the following permanent changes regarding the estate and gift taxes:

  • The unified lifetime transfer tax exclusion was permanently fixed to $5 million, adjusted for inflation ($5,250,000 in 2013), with a maximum tax rate of 40%.
  • Portability of Deceased Spousal Unused Exclusion (DSUE) amounts between spouses was made permanent.
  • Trusts are subject to maximum income tax rates of 39.6% for federal purposes and 13.3% for California purposes.
  • “Qualified” dividends are now taxed at a maximum rate of 20% for trusts with taxable income over $11,950 (indexed for inflation).
  • Long-term capital gains are now taxed at a maximum rate of 20% for trusts with income over $11,950 (indexed for inflation).

Beginning in 2013, the new 3.8% Medicare net investment income excise tax applies to trust investment income over $11,950 (indexed for inflation). Net investment income includes interest, dividends, capital gains, and all types of passive income, including rents and royalties, less investment expenses.

The passage of California Proposition 30 increased taxes on trusts with taxable income of $250,000 and above beginning with tax year 2012.

With these items in mind, we are reminding our fiduciary clients that the following best practices have become even more important in 2013’s changed environment:

  • Careful distribution management:  If the trustee has discretion over distributions to beneficiaries, consider managing distributions to maximize the amount of income taxed at the beneficiary level. Thresholds for the Obamacare taxes and increased capital gains rates are much higher for individuals than for trusts.
  • Portfolio reassessment: As we previously suggested, trustees should be working closely with investment advisors to ensure that the trust’s investment mix continues to be appropriate considering the current tax environment and the goals of the trust.

Gift Planning for Individuals:
The lifetime gift exemption for individuals for 2013 is $5,250,000, with a maximum rate of 40%. The annual exclusion for 2013 has been adjusted for inflation to $14,000.

  • Remember that tuition paid directly to a college or medical expenses paid directly to a service provider do not count as taxable gifts.
  • Consider the implications of any impending graduations on the Section 529 college savings  plans you have set up for your descendants: is there another student in the family that can use funds set aside for a graduate that isn’t continuing his or her education? Should the plan be cashed out and distributed to the donor or the beneficiary?
  • Does a new graduate need help purchasing a home? In a continued low interest rate environment, intra-family loans continue to be an attractive way to allow the younger generation to utilize family assets without incurring any transfer tax consequence.

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