Estate and Gift Tax Escapes the Fiscal Cliff

04 Jan

After months of uncertainty and debate about what changes would be made to the Federal estate and gift tax (transfer tax), the newly minted American Taxpayer Relief Act (the “Act”) has provided answers that many were anxiously awaiting.  While many believed the estate and gift tax landscape would undergo significant change from the taxpayer-friendly laws of the past few years, the end result looks surprisingly similar to that of 2012.

A little background information is necessary to fully understand the significance of the effect of the Act.  Absent the newly passed laws, beginning in 2013 the estate and gift tax exclusion amount would have reverted back down to $1 million for each individual (from $5.12 million in 2012) and the maximum tax rate would have increased to 55% (from 35% in 2012).  As you can see, there was the possibility of substantial change in 2013, and while many expected the final numbers would fall somewhere in between the two extremes, few predicted the actual outcome.

After passage of the Act, the estate and gift tax exclusion amount (unified credit) will remain at $5 million (adjusted for inflation, so roughly $5.25 million)  for each individual, which means that someone who dies in 2013 with an estate of less than $5 million pays no Federal estate tax, assuming they had not used up any of their exclusion amount during life through gifting.  Also, the generation skipping transfer tax will get the same treatment, remaining at $5 million, adjusted for inflation.  Needless to say, these are big wins for taxpayers with estates in excess of $1 million.  Another victory for married taxpayers is the permanent status of portability, which allows a surviving spouse to use his or her deceased spouse’s unused unified credit amount.  The one change is the top tax rate for estate and gift tax rising from 35% to 40%.  While there are sure to be complaints about this increase, keep in mind that the top rate was set to be a staggering 55% had the new laws not taken effect.

So how much does this change the estate plans of individuals and married couples?  The answer depends on how those individuals and couples were told to plan for 2013 and beyond.  The people most affected by the “new” laws may have been the ones who scrambled to make substantial year-end gifts in 2012 under the guidance that the $5.12 million estate and gift tax exclusion would drop significantly after December 31st.  Needless to say, there are probably some people out there with gifter’s remorse.  Regardless of where they stand or what they did in 2012, having some stability in the estate and gift tax landscape is welcomed by both professionals and clients alike.


This post is provided for informational purposes only and does not constitute legal advice.  It is intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results.  It is not intended to create an attorney-client relationship and is offered only for general informational and educational purposes.  You should not act or rely on any information contained in this website without first seeking the advice of an attorney.


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3 Responses to “Estate and Gift Tax Escapes the Fiscal Cliff”

  1. Joe E January 16, 2013 at 11:38 PM #

    Great article. I really liked how you simplified all these complicated changes (or lack or changes). Looking forward to reading more posts! Do you think Estate Taxes and Gift Taxes are still on the table for possible changes in the near future or are these issues pretty set for the next couple of years?

    • Matt Staub January 17, 2013 at 8:06 PM #

      Thank you Joe, and you bring up a good question. While it was great to finally see some certainty in the estate and gift tax landscape, there are signs out there that suggest future legislation is looming.

      First, the Act failed to address certain estate planning tools that some expected to be restricted or eliminated altogether in 2013. Some examples are grantor retained annuity trusts (GRATs), grantor trusts, dynasty trusts, and discount valuations for transfers in family entities to name a few. These are extremely advantageous mechanisms for wealthy taxpayers who would otherwise owe millions in taxes if these tools didn’t exist.

      Another reason to believe there are changes still to come is because the fiscal crisis was only averted, not solved completely. The country is still in substantial debt and raising taxes and/or eliminating certain tax benefits would be a tremendous source of revenue (see above).

      All this being said, it’s impossible to know if or when changes will come so as always, it’s a good idea to take advantage of the laws presently in place while you still can.


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