ESTATE AND GIFT TAX IMPLICATIONS FOR THE
AMERICAN TAXPAYER RELIEF ACT OF 2012
On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 ("ATRA"), which the President signed into law on January 2, 2013. ATRA permanently extends the existing estate and gift tax legislation that was set to expire at the end of 2012, despite various attempts by both political parties over the previous two years to either repeal the tax altogether or to drastically cut back the exemption amounts and increase the tax rates.
In the end, Congress brought resolution to the uncertainty that estate planners have been dealing with for the past twelve years, announcing that the 2012 rates and exemption amounts for the gift, estate and generation-skipping transfer (GST) taxes are permanently extended and the exemption amounts are permanently indexed for inflation.
Without ATRA, the rates would have increased from 35% to 55% and the exemption amounts would have decreased from $5,120,000 to $1,000,000 per person. Congress's only substantive change to the 2012 law was to increase the rate from 35% to 40% on any taxable transfers. The exemption amount remains unified between the gift and estate taxes, indexed for inflation based on $5,000,000 in 2011. It is anticipated that the 2013 exemption amount will be $5,250,000 after the IRS confirms its inflation adjustments by a 2013 revenue ruling. For taxpayers that have previously used the maximum amount of their exemption amounts through lifetime gifting, the inflation adjustment will allow them to make additional gifts in 2013 of up to $130,000.
ATRA also made permanent the "portability" provisions introduced by the 2011 estate tax legislation. Portability allows an executor of an estate to transfer any unused exemption amount from a deceased spouse to his or her surviving spouse. If so transferred, the surviving spouse can make lifetime gifts and/or shelter his or her gross estate from estate tax up to the combined exclusion amounts.
Significantly, ATRA did not address many of the restrictions and limitations that had been proposed throughout the prior years to limit many of the advanced estate planning techniques that planners use to transfer assets out of the estates for high net worth taxpayers. Specifically, proposals regarding a minimum ten-year term for grantor retained annuity trusts (GRATs), limitations on the duration of a GST-exempt trust, and restrictions on valuation discounts were not incorporated into ATRA. As enacted, the new legislation will allow estate planners to continue to utilize these techniques to transfer wealth with minimal transfer taxes triggered.
Unrelated to the recent tax legislation, the annual exclusion amount (which is already permanently indexed for inflation) increased from $13,000 in 2012 to $14,000 per person for 2013. Married spouses can continue to combine their annual exclusion amounts (called "gift splitting") and gift up to $28,000 per recipient per year, without triggering any gift tax liability.
With the passage of ATRA, Americans can now effectively plan how they want their assets distributed upon their death. While ATRA probably doesn't give taxpayers any reason to alter their existing estate plan, everyone should definitely revisit their plan this year if there have been changes in finances or personal life and to ensure that all parts are compliant with the gift and estate tax laws that are now made permanent by ATRA.
Please contact a member of Jackson & Campbell's Trusts and Estates practice group if you have additional questions.
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