The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law by President Obama on January 2, 2013 to avert the so-called fiscal cliff. In addition to many other changes to existing tax laws, the Act makes three specific and substantial changes to the Federal Estate, Gift and Generation Skipping Taxes that are each discussed briefly below:
Permanent Unified Credit – Generally speaking, the Act makes permanent the estate, gift and generation skipping tax regimes existing in 2012. The Act makes the unified credit for estate, gift and generation skipping taxes permanent at $5 million dollars per person (adjusted for inflation). The adjusted credit amount for 2012 is $5.12 million and the adjusted credit amount for 2013 is $5.25 million. Under the Act, the unified credit is set to continue to increase each year based on inflation. From an estate planning standpoint, this means that with proper estate planning, a married couple can utilize each spouse’s unified credit amount, and essentially double the amount they can pass to the next generation tax free (For example, with proper planning, if both spouses die in 2013, they could pass $10.5 million to the next generation tax free). We suggest that you consult with your estate planning attorney to determine if your estate requires special planning to take full advantage of the new unified credit amounts.
Portability – The Act also makes permanent the portability of spouses’ unused exemption amounts. This means that the surviving spouse can use their deceased spouse’s unused unified credit if certain criteria are met. In order to take advantage of such portability, the deceased spouse’s personal representative must file an estate tax return making such election, and the surviving spouse cannot later remarry. The Act also sets the portability amount permanently at $5 million, adjusted for inflation, similar to that of the unified credit amount discussed above. Therefore, if the requirements under the Act relative to portability are met, a surviving spouse can utilize his or her predeceased spouse’s unified credit against estate tax at the time of the surviving spouse’s death. Be aware that although portability applies to the estate and gift tax exemption, it does not apply to the generation skipping tax exemption.
Tax Rate Increase – The Act also increases the tax rates for estates that are larger than the applicable exclusion amounts above. The following tax rates now apply when estates exceed the applicable exclusion amounts above by: $500,000 to $750,000 – 37% tax rate applies; $750,000 to $1 million – 39% tax rate applies; and over $1 million – 40% tax rate applies. The Act makes these tax rates permanent.
Annual Gift Tax Exclusion Amount – The annual gift tax exclusion amount was not changed by the Act and is $14,000.00 for 2013, and will continue to be adjusted for inflation in the future in increments of $1,000.00.
The Act makes the above changes permanent, meaning estate planners now have a permanent set of rules to work from for the first time in several years. However, the changes made by the Act will only be permanent for as long as Congress allows them to be. Who knows how long the certainty will last?
The above material is only a brief discussion of the topics mentioned and we advise that you consult with your estate planning attorney regarding your estate for specific advice relative to how the Act may affect your estate and estate plan.