Wealth Management Update

We Didn't (Quite) Fall off the Cliff, But We Still Have To Clean up the Mess!

When the clock struck midnight on December 31, 2012, estate planning practitioners said "good night" to an unprecedented period of working with clients to maximize transfer tax planning opportunities. When we awoke on January 1, 2013, we discovered we had only nearly "fallen off the cliff," and, as a result of ATRA, most of the year-end transfers we orchestrated may have been for naught. While the House of Representatives debated ATRA well into the night of January 1, it ultimately approved the bill and sent it to the White House. The President authorized signature remotely via his so-called "autopen" late on January 2, while he vacationed with his family in Hawaii.1

The enactment of ATRA means that the three hallmarks of TRA 2010 – namely, (i) the reunification of the estate and gift tax regimes, (ii) the $5 million estate, gift, and GST tax exemptions, as indexed for inflation ($5.25 million for 2013), and (iii) portability – have all become permanent fixtures in federal transfer tax law. ATRA will impose a maximum transfer tax rate of 40 percent, and also has made permanent the following provisions, as introduced by EGTRRA:

i. the deduction for state death taxes under Code Section 2058;

ii. certain provisions related to the extension of time to pay estate tax under Code Section 6166; and

iii. certain GST tax "simplification" provisions, including the automatic allocation of GST tax exemption to "indirect skips" and related elections with respect to "GST trusts" (under Code Section 2632(c)), retroactive allocation of GST tax exemption when there is an "unnatural order of deaths" (under Code Section 2632(d)), the qualified severance rules (under Code Section 2642(a)(3)), modification of certain GST valuation rules (under Code Section 2642(b)) and certain relief provisions when there is a failure to allocate GST tax exemption timely or properly (under Code Section 2642(g)).

Additionally, ATRA implements a technical correction to the portability provisions of TRA 2010. In calculating the deceased spousal unused exclusion amount under Code Section 2010(c)(4)(B), TRA 2010 referred to the "basic exclusion amount" of the last deceased spouse of the surviving spouse. Many practitioners thought this reference was erroneous given the now-famous Example 3 of the Joint Committee on Taxation's "Technical Explanation of the Revenue Provisions Contained in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010."2 Indeed, in March 2011, the Joint Committee on Taxation issued an errata statement suggesting that a technical correction may be necessary to substitute "applicable exclusion amount" for "basic exclusion amount."3 The Treasury Department subsequently confirmed this thinking in promulgating the Temporary Treasury Regulations regarding portability.4 ATRA now provides a statutory fix by substituting the term "applicable exclusion amount" for "basic exclusion amount." This provides statutory confirmation of the regulatory fix.

Alas, the better advice of estate planning practitioners "to use or lose" the "expiring" $5 million exemption and 35 percent rate prior to the New Year has now proven unnecessary in many cases. Nonetheless, we need to make sure that the proverbial "i's" are dotted and "t's" are crossed with respect to the transfers that were made hastily at the end of 2012, so that such transfers are respected. We address below "post-2012" transfer tax issues that should be examined by practitioners and clients who made significant gifts before the clock struck midnight on December 31, 2012.

Gift Tax Returns

For gifts made in 2012, federal gift tax returns (Form 709) are due on April 15, 2013. Of course, this date can be automatically extended until October 15, 2013 by filing for an income tax extension on Form 4868. Although many clients made gifts at or below the...