Congress Passes Extended Estate and Gift Tax Relief for 2013 (With a Change in Rates)
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.
The only change in the Bill that could result in increased estate or gift tax is the restoration of some additional rate brackets and a top marginal rate of 40 percent. The previous top marginal rate, in 2011 and 2012, was 35 percent. In effect, after available deductions are claimed on an estate tax return or after available deductions and annual exclusions (if any) are claimed on a gift tax return, the application of the lifetime exclusion amount (see below) will cause the net estate tax or net gift tax due to be imposed at an effective flat rate of 40 percent in 2013 and later years.
For federal gift tax and estate tax purposes, the full lifetime exclusion amount for an individual who has not previously made any taxable gifts remains at $5,000,000, plus an annual inflation adjustment for gifts made after 2011 or for the estates of individuals dying after 2011. In 2012, the inflation-adjusted maximum exclusion amount was $5,120,000 for estate tax, gift tax, and generation-skipping transfer tax purposes.
As of January 2nd, the IRS has not officially announced the 2013 inflation adjustment of the lifetime exclusion amount for individuals dying or for gifts made after 2012. But one expert commentator has said that the inflation-indexed maximum lifetime exclusion amount will be $5,250,000 in 2013.
Because the federal generation skipping transfer (GST) tax rate is calculated and imposed at a flat rate, based on the top marginal estate and gift tax rate, the GST tax rate for transfers on or after January 1, 2013 will be 40 percent. For an individual who has not previously used up any of his or her lifetime GST exemption, that lifetime GST exemption amount remains at a maximum of $5,000,000, or $5,250,000 with inflation indexing for 2013 transfers.
As was the case in 2011 and 2012, an individual can use the full amount of his or her unused lifetime exclusion amount to shelter large (taxable) gifts from the gift tax. Every dollar of the lifetime exclusion amount that is used up on lifetime gifts will leave one dollar less of the exclusion available for use after death, to shelter assets from the estate tax.
For married individuals who die after 2010, the "portability" of the unused lifetime exclusion amount between spouses (after one spouse dies) is now a permanent part of the federal gift and estate tax law. The Bill makes a technical correction that had been proposed in 2011, in order to eliminate confusion about how to calculate the "portable" exclusion amount that the surviving spouse has available for later use, if a timely portability election is made. The maximum exclusion amount that is "portable" after the death of one spouse remains at $5 million, and as under 2011-12 law, it is not indexed for inflation. And as under 2011-12 law, "portability" of the lifetime exclusion cannot be used for GST tax purposes.
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.