Tax And Estate Planning Effects Of The American Taxpayer Relief Act Of 2012

Keywords: tax and estate planning, American Taxpayer Relief Act 2012, federal income, estate tax, gift tax

The American Taxpayer Relief Act of 2012 (the Act) became effective on January 2, 2013. The Act contains a number of notable changes to the federal estate, gift, generation-skipping transfer (GST) and income tax laws, which are summarized in this Legal Update.

Estate, Gift and GST Tax Changes

Rates and Exemption Amount. Prior to the enactment of the Act, the estate, gift and GST tax rates were scheduled to increase from 35 percent to 55 percent in 2013. At the same time, the estate and gift tax exemption was scheduled to decrease from $5.12 million to $1 million and the GST tax exemption was scheduled to decrease from $5.12 million to approximately $1.39 million. However, the Act prevented these changes by providing new rates and exemption amounts for the estate, gift and GST taxes.

The Act purports to permanently unify the estate and gift taxes, meaning that the same rate and exemption amount will apply to the estate tax and the gift tax. The Act increases the estate and gift tax rate from 35 percent to 40 percent and sets the GST tax rate at a flat 40 percent. In addition, the Act makes permanent the $5 million estate, gift and GST tax exemption that has been in effect since 2011. This amount is adjusted for inflation after 2011, resulting in $5.25 million estate, gift and GST tax exemptions for 2013.

Portability. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included a provision that allowed a surviving spouse to use a deceased spouse's unused estate tax exemption, referred to as "portability." The Act makes permanent this portability provision, which otherwise would have expired on December 31, 2012. Thus, a married couple has a combined federal estate and gift tax exemption of $10.5 million in 2013.

However, there is currently no portability at the state estate tax level. Accordingly, estate plans should be carefully structured so as to take advantage of federal estate and gift tax portability to the maximum extent possible, while minimizing state estate tax liability. In addition, the GST tax exemption is still not portable, so careful planning is necessary for taxpayers who wish to minimize future estate taxes by setting up GST or "dynasty" trusts for their descendants.

Annual Gift Tax Exclusion. As in prior years, the annual gift tax exclusion continues to be indexed for inflation. The...