Estate and Gift Tax Changes Enacted

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On January 1, 2013, Congress passed the Taxpayer Relief Act of 2012.  The President quickly signed it into law.   Among other things, the 2012 Act made permanent some of the estate, gift and generation-skipping transfer tax provisions which had been set to expire after 2012.   If you have not talked to your estate and gift planning attorney lately, now would be a good time to touch base and discuss how these recent changes affect your estate and succession plans.

Background on Transfer Tax Changes.  Before enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) there was no gift tax and no estate tax on the first $675,000 of transfers during life or at death for gifts made and individuals dying in 2001. These two taxes were tied together under a unified system having a top rate of 55%.  EGTRRA increased the exemption amount in stages after 2001. For individuals dying in 2006 through 2008, the exemption was $2 million. The exemption rose to $3.5 million for individuals dying in 2009. But under EGTRRA, the gift and estate exemptions were no longer unified, and the gift exemption remained at $1 million for all years after 2001.  Under EGTRRA, the top estate and gift tax rate was reduced in stages. The top rate was 45% for transfers in 2007 through 2009. In 2010, there was to be no estate tax and the top gift tax rate was to be 35%.

All of the EGTRRA changes were set to expire at the end of 2010. If allowed to expire, the rates and rules were to revert to those that applied pre-EGTRRA. However, the 2010 Tax Relief Act provided temporary relief from the EGTRRA expiration. Among other changes, the 2010 Act reduced the maximum tax rates for 2011 and 2012, and continued other estate and gift tax relief provisions that would otherwise have expired after 2010.  But absent enactment of the 2012 Act, the relief granted by EGTRRA and the 2010 Act would have expired, and the rates and rules in place pre-EGTRRA would have again applied.

Permanent Exemption Amount.  The 2012 Taxpayer Relief Act permanently establishes the estate exemption amount at $5 million per person.  The exemption amount is indexed to increase by an inflation factor.  For 2012, the exemption amount as indexed increases to $5,120,000. The exemption is allowed in the form of a unified credit against tax.

Tax Rates Increased.  The top estate and gift tax rate for gifts made and decedents dying in 2012 was 35%. The 2012 Taxpayer Relief Act changes the maximum rate to 40% for gifts made and decedents dying after 2012. Under the Act, transfers over $500,000 are taxed at 37%, transfers over $750,000 are taxed at 39% and transfers over $1,000,000 are taxed at 40%.

Gift Tax Changes.  Under the 2010 Act, the exemption was $1 million and the gift tax rate was 35% for gifts made in 2010. For gifts made after 2010, the gift tax was unified with the estate tax, with an exemption amount of $5 million (indexed after 2011) and a top rate of 35%. The 2010 Act also made changes to how gift taxes are taken into account in computing estate and gift taxes. All of the temporary changes made under the 2010 Act have now been made permanent by the 2012 Taxpayer Relief Act, except that the 2012 Act changed the maximum gift tax rate to 40%.

Generation-Skipping Tax Changes.  Under the 2012 Taxpayer Relief Act, for decedents dying and gifts made after 2012: the GST tax exemption is equal to the basic exclusion amount of $5 million ( indexed); the GST tax rate is 40%; and the technical modifications to the GST rules made by EGTRRA continue to apply.

Portability of Unused Exemption between Spouses.  The 2010 Act authorized estates of decedents dying after 2010 and before 2013 to elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount. If the executor of the decedent's estate elects transfer of the DSUE amount, the surviving spouse can apply the DSUE amount received from the estate of his or her deceased spouse against tax liability arising from subsequent gifts and death transfers. The 2012 Taxpayer Relief Act made this portability provision permanent.

If you have any questions or comments about the 2012 Act estate and gift tax changes, please give our estate planning attorneys, John Clough, Jim Jacobson or Joe Mattera, a call at 937-223-1130, or shoot me an email at  Jsenney@pselaw.com.

AND ONE MORE THING. The 2012 Taxpayer Relief Act also retains many favorable income tax breaks for businesses and individuals, and also adds a number of new provisions to the tax code.  More about this will be coming out in a future blog. Call me at Jsenney@pselaw.com or 937-223-1130 if you have questions and can’t wait.