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.
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