Michigan Probate and Estate Planning Journal
The Spring 2013 issue of the Probate & Estate Planning Journal is available online. We hope you enjoy the variety of topics covered. Jim Spica has contributed a scholarly treatise on decanting issues, and Haans Mulder provides helpful advice for optimizing business succession planning. Liisa Speaker's article on guardianship appeals is a helpful primer, and Tom Sweeney's update on the 2012 EPIC amendments is a must read. Finally, as always, our regular columnists have been hard at work generating material to keep you up to date on legislative developments, ethics issues, new case law, and recent tax developments. Thanks to our contributors, who have given so generously of their time and talents!
If there are issues you would like to suggest for future coverage, or if you are interested in contributing to the Journal, please feel free to contact me.
Nancy L. Little
2012 American Taxpayer Relief Act Summary
The Probate & Estate Planning Council maintains a Transfer Tax Committee, comprised of Marguerite Munson Lentz, Thomas F. Sweeney, and Nancy H. Welber, to monitor changes to transfer taxes. The Committee has prepared the following succinct summary of the 2012 American Taxpayer Relief Act (ATRA) for our Section members:
A. Estate Gift and Generation Skipping Transfer Taxes
- The $5 million base used to determine the credit against the tax will continue with COLA adjustments which brings the 2013 amount to $5.250 million. This amount will continue to apply to lifetime gifts, death time transfers, and GST transfers.
- The 37% and 39% rate brackets have returned, but that only affects the applicable credit. The new tax rate above the exemption amount is 40% rather than either 35% for the last three years, or 45% which was the rate before 2010.
- Application of the DSUE (Deceased Spouse's Unused Exemption) for portability purposes in the second spouse's estate has been retained and clarified.
B. Fiduciary Income Tax
Trusts or estates will be subject to the new Medicare income tax based on the lesser of net investment income or adjusted gross income that exceeds the income amount at which the highest tax rate applies to a trust or estate ($11,950 in 2013). If income is distributed or distributable under the instrument, the tax apparently does not apply to that income. It only applies to income taxable to the trust.
C. Individual Income Tax
There is now a permanent patch for AMT purposes with exemptions of $50,600 (S) and $78,500 (M). Apparently these amounts will be subject to COLA. Although the alternative tax "patch" has been permanently installed, there are four other significant changes affecting individual income taxation. Two of these are pegged to taxable income and two are pegged to adjusted gross income. To avoid all of them, adjusted gross income needs to be under $250,000 (S) or $300,000 (M).
- Taxable Income (other than long-term capital gain or qualified dividend income) for taxpayers having taxable income in excess of $400,000 (S) or $450,000 (M) will be taxed at a new higher rate of 39.6%. [This is the one we have heard most about.]
- The phase-out of deductions for personal exemptions and itemized deductions is being reinstated and the phase-out will commence when adjusted gross income exceeds $250,000 (S) or $300,000 (M).
- The 3.8% Medicare income tax will apply to net investment income when adjusted gross income exceeds $200,000 (S) or $250,000 (M). It will apply to the excess of AGI over the threshold amount if the excess is less than net investment income. [Investment income includes capital gains and many other items of income. See Prop. Regs. 1.1411-1, et. seq.]
- A new 20% tax rate has been added for long term capital gain and qualified dividend income when taxable income exceeds $400,000 (S) or $450,000 (M).
This means that there will be several possible long term capital gain/qualified dividend rates including a (i) 15% rate if the taxpayer has falls below both the $400,000 (S)/$450,000 (M) long term capital gain/qualified dividend taxable income threshold and the $200,000 (S)/$250,000 (M) adjusted gross income Medicare tax threshold and, (ii) 18.8% rate when taxable income is below the long term capital gain/qualified dividend taxable income threshold of $400,000 (S) or $450,000 (M), but above the Medicare tax threshold of $200,000/$250,000 adjusted gross income. Finally, (iii) if the taxpayer is above both of those thresholds, the tax rate on long term capital gain and qualified dividend income will be 23.8%.
Between the additional rate brackets added by ARTA; the different thresholds in ARTA for the 39.6% bracket, phase out of personal exemptions and itemized deductions, 3.8% net investment income tax, and the 20% capital gains tax, and existing threshold for the 0.9% additional Medicare tax ($200,000 (S) and $250,000 (M)), ARTA has managed to increase the complexity of the Internal Revenue Code exponentially.
D. Charitable Contribution Rollover
Charitable contribution rollovers for IRA owners who are over age 70½, technically called "qualified charitable distributions," are reinstated for 2012 and 2013. For 2012 only, an eligible account owner could make a payment to charities by January 31, 2013, if he or she received an IRA distribution during December, 2012. The account owner can elect on his or her 2012 1040 to have that payment to charity (up to the amount of the December IRA distribution and not to exceed $100,000) be treated as if it occurred on December 31, 2012. If an IRA owner did not receive a December payment, then he or she could have done a direct rollover in January, 2013, and then elect on his or her 2012 1040 to treat it as a 2012 QCD. Other than allowing the January direct payment option or the special January direct rollover option, the other requirements for a charitable rollover must be met. View IRS reporting information for January, 2013, qualified charitable distributions. For 2013 QCDs, the usual charitable direct rollover rules apply.
Thanks to Meg, Tom, and Nancy for their efforts in preparing this information!
Nancy L. Little
Editor, Probate & Estate Planning Journal