The proverbial “fiscal cliff” was averted on January 1, 2013, when Congress approved H.R. 8, the “American Taxpayer Relief Act.” The federal estate tax component of the fiscal cliff was oftentimes overshadowed by the income tax ramifications. However, anyone with experience in estate tax planning will tell you that the threat of dropping the exemption amount from $5 million per person in 2012 to $1 million per person in 2013 posed a substantial threat to individuals and small businesses alike. Fortunately, Congress agreed in substance to extend the 2012 estate and gift tax rules and, perhaps more importantly, agreed to make those changes permanent.
There are five key estate tax items that you should be aware of. They are as follows:
(1) An extension of the $5,000,000 estate/gift tax exemption which is now indexed for inflation.
(2) A continuation of the generation-skipping tax exemption in an amount equal to estate/gift tax exemption.
(3) A top marginal rate of 40% on taxable estates.
(4) Permanent extension of the portability rules.
(5) The elimination of the “sunset” provisions of the Tax Act put into effect in 2001.
Essentially, from an estate tax perspective, the measure makes permanent all of the provisions of the 2012 rules except the rate. In other words, there is an exclusion amount of $5 million per person, adjusted for inflation. For 2013, the exclusion is $5.25 million. This exclusion amount remains “unified” with the federal gift tax so that up to $5.25 million per person may be transferred tax free at death or during lifetime, with lifetime taxable gifts subtracted from the exclusion amount remaining for use at death. The tax rate is capped at 40% rather than the 35% provided in prior law.
The “portability” provision for married couples is similarly retained by the new law. Thus, the unused exclusion amount of the first spouse to die may be used by the surviving spouse, assuming an estate tax return is filed for the pre-deceasing spouse.
The Generation-Skipping Tax (GST) exemption is also set at an annual inflation-adjusted $5 million. However, as with prior law, GST exemption is not portable. Thus, in order to preserve the GST exemption of the first spouse to die, the use of a credit shelter trust is needed. Incidentally, the use of a credit shelter trust is also advisable to provide remarriage protection and other benefits.
Under prior law, the “Bush Tax Cuts” were legislatively scheduled to expire on December 31, 2010. That “sunset provision” was extended in December of 2010 for an additional two years, or until December 31, 2012. The fiscal cliff legislation extended the rules indefinitely so that there is no longer a sunset provision. The rules can always be changed, but only by the affirmative act of Congress.
The end result: taxpayers now will enjoy rules that are considerably more “taxpayer friendly” than the rules which were otherwise scheduled to go into effect if Congress had taken no action.