New Law Makes the $5 Million Estate Tax Exemption “Permanent” and Maintains Spousal “Portability”
By Michael Zosky
Earlier this year, after weeks of negotiations, Congress and the President arrived at an agreement to avoid the so called “fiscal cliff.” If Washington had allowed the expiration of the Bush-era tax cuts, it would have resulted in significant tax increases beginning January 1, 2013. On January 2, 2013; therefore, President Obama signed into law the American Taxpayer Relief Act of 2012 (the so-called “2012 Act” – even though it became law in 2013).
One of the items addressed in the 2012 Act was the lifetime estate tax exemption amount. Congress and the President surprised many practitioners and taxpayers by retaining the exemption at its current, $5 million level, indexed to inflation; but they did increase the tax rate for the estate and gift taxes from the 35 percent rate that applied in 2011-2012, to 40 percent going forward. Because of the expiration of the so-called “Bush tax cuts,” on January 1, 2013, the estate and gift tax exemption amount actually dropped from $5.12 million to $1 million, and the marginal estate and gift tax rate rose from 35 percent to 55 percent—for a few hours – only to bounce back up upon passage of the 2012 Act. The 2012 Act makes “permanent” (i.e. no specific expiration date) the inflation adjusted $5 million exemption amount, and sets the marginal estate tax rate at 40 percent. The indexed exemption now results in a $5,250,000 exemption amount for 2013 (an increase of $130,000 over the 2012 amount).
With this new law, Americans will continue to be able to make lifetime gifts or pass at death $5 million or more in assets without incurring any federal transfer tax liability. In addition, because the exclusion is indexed for inflation, those individuals who had previously used their entire $5.12 million exemption may be able to make additional tax-free gifts as the exemption increases with inflation indexing, starting with approximately $130,000 in 2013.
Keep in mind that this lifetime exemption amount applies in addition to the annual exclusion, which remains as it was before, except that it too is increased with inflation indexing to $14,000 per donor per donee per year.
In another important provision of the Act, Congress kept the inter-spousal “portability” provisions. Beginning in 2011, a widow or widower can elect to add their predeceased spouse’s unused lifetime exemption amount to their own exemption amount. To make this election, however, a federal estate tax return (Form 706) must be filed within 9 months after the death of the first spouse. This election can provide significant tax relief to a family after the death of a surviving spouse.
Perhaps the best news in all of this new law is that, after 12 years of uncertainty about the estate and gift tax due to looming expiration of the law; finally, there is a measure of permanence provided by the 2012 Act, allowing taxpayers and their advisors greater ability to plan for these significant potential drains on family wealth. At least it’s permanent until Washington gets together to make another change…stay tuned.
To discuss how your estate plan may benefit from these new changes, please contact the Estate, Trust and Wealth Strategies Group at the Royse Law Firm at (650) 813-9700, and specifically, either Practice Leader David Spence (extension 211 or email at: email@example.com), or Michael Zosky (extension 212 or email at: firstname.lastname@example.org).
Please see www.RroyseLaw.com or contact Royse Law Firm, PC at email@example.com for additional information.
Follow us on Twitter
Like our Facebook Page
Visit our YouTube Channel
See us on Pinterest