Estate Tax Changes Resulting From the American Taxpayer Relief Act of 2012

The federal estate tax exemption represents the amount of money which an individual can give away during his or her lifetime, or, at death, without federal estate tax liability. The exemption amount grew from $675,000 per person in 2000/2001, to $5.12 million in 2012. Throughout 2012, those of us who advise clients in matters of estate planning have done so within the context of the anticipated reduction in the lifetime federal estate tax exemption to $1 million which was set to take effect on January 1, 2013. All of that changed with the adoption of the American Taxpayer Relief Act (ATRA) on January 3, 2013.

Federal Estate Tax and Gift Tax Exemption
The ATRA provides that the per person lifetime, federal estate tax and gift tax exemption amount will be $5 million, adjusted annually for inflation. On January 11, 2013, the IRS announced that adjusted for inflation, the applicable exemption amount for 2013 is $5,250,000. The top rate of taxation for estates over the exemption amount will be 40%, as opposed to 35% in 2012 (this rate was to have grown to 55% as of January 1, 2013).

In addition, the annual gift tax exemption has been raised from $13,000 in 2012 to $14,000 in 2013, and beyond. This amount is also subject to upward adjustment based on inflation. The annual gift tax exemption is the amount of money that you can give away to any one individual in any given year without potential gift tax liability, and without having to take advantage of a portion of the lifetime exemption amount.

Portability of the Federal Estate Tax Exemption
The ATRA also makes permanent the concept of “portability” which was first introduced in 2010. Stated simply, portability allows the second spouse to die the opportunity to take advantage of any unused estate and gift tax exemption of the first spouse. Portability is not automatic and requires an election and the filing of an estate tax return for the first spouse to die, even if no federal estate tax is owed. While seemingly a panacea for married couples whose estates exceed the individual exemption amount, but are still less than the combined exemption available to both spouses ($10,500,000 for 2013), portability is a fairly new concept and is subject to a number of rules and complex considerations.

Interesting to note that these changes (and others) are said to be “permanent.” That’s “Washington-speak” which simply means that the legislation contains no built-in sunset provisions. Only time will tell how “permanent” these changes actually are.

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