Congress Passes Extended Estate and Gift Tax Relief for 2013 (With a Change in Rates)

January 3, 2013
Legal Updates

At about 1:30 A.M. on January 1, 2013, the U.S. Senate voted 89 to 8 to pass the "American Taxpayer Relief Act of 2012" (H.R. 8) in order to prevent many federal tax increases that would have otherwise occurred automatically on January 1st, as Bush-Era tax cuts were scheduled to expire.  Later on the afternoon of January 1st, the House of Representatives voted 257 to 167 to approve the Senate-passed bill without further amendments. President Obama has said that he will sign the bill.

The Bill extends most of the 2011-2012 estate and gift tax relief into 2013 and later years, with no current expiration or sunset date. 

In light of the estate and gift tax relief that this Bill has preserved for 2013 and later years, wealthy Americans have the same incentives — to update their personal estate plans and to at least think about making significant taxable gifts — that they had in 2011 and 2012.  The only differences are that (1) the potential estate and gift tax savings will be higher, because the top marginal rate is now 40 percent instead of 35 percent and (2) the Bill does not place any expiration or sunset date on the estate, gift, and GST tax rules or on the current lifetime exclusion amount (The lifetime exclusion amount was previously subject to year-to-year change or potential automatic reduction between 2001 and 2012.)

Although the Bill, as passed, makes estate and gift tax relief permanent, that tax relief may not remain "permanent" in practical effect.  Before the end of February 2013, Congress and the Obama Administration must wrestle with the spending-side issues posed by the "fiscal cliff" and the need to extend the federal debt ceiling again. Both of these problems were merely postponed by the Bill. Any of the tax relief contained in the Bill could be curtailed, repealed, given an expiration date, or otherwise "held hostage" during the legislative process, as Congress and the President look for ways to cut spending or to increase revenue without tinkering with tax rates.   Several loophole-closing changes to the estate, gift, and GST tax laws have been part of the Administration's budget proposals for the last 3 years.  These loophole closers could be added to another tax-reform-and-spending-reduction bill at any time this year.

Wealthy individuals who were thinking about making significant taxable gifts in 2012, but who did not manage to move forward with those plans or to complete the gifts, should revisit those plans as early as possible in 2013, before Congress has an opportunity to make unfavorable changes in the rules described above.