FISCAL CLIFF DISASTER AVOIDED - Part I: The American Taxpayer Relief Act of 2012 and Its Impact on U.S. Estate Tax and Gift Tax

Late New Year's Day, Congress approved new tax legislation known as "The American Taxpayer Relief Act of 2012" ("2012 Tax Act") and by doing so has avoided a fiscal cliff disaster.  Under the new law, most of the taxpayer friendly "Bush Tax Cuts" have been made permanent features of the Tax Code.  The following is a brief summary of the U.S. Estate Tax and Gift Tax provisions under the 2012 Tax Act.

  • Estate/Gift Tax Exemption - Unchanged at $5 Million (Inflation Indexed). Legislators did not change the amount that an individual can give during life or pass on death to someone other than a spouse (the "Exemption"). The Exemption stays at $5 million (indexed for inflation). In 2012, the Exemption was $5.12 million. Under the new law, the 2013 Exemption is scheduled to increase slightly for inflation to $5.25 million ($10.5 million for married taxpayers). If the 2012 Tax Act had not passed, the Estate and Gift Tax Exemption was scheduled to decrease to $1 million.
  • Increase in Estate Tax and Gift Tax Rates. The new law increases the Estate Tax Rate and Gift Tax Rate by 5%. These Tax Rates go from 35% in 2012 to 40% in 2013 and beyond. Without passage of the new law, Estate and Gift Tax Rates were scheduled to increase to a top rate of 55%.
  • Portability Made Permanent. In 2010, the government enacted a provision in the law known as "Portability" which allowed a decedent to transfer his or her unused Estate Tax Exemption to his or her surviving spouse. The goal of Portability was to allow a decedent to pass everything to a surviving spouse while still preserving the deceased spouse's Exemption. Because of Portability, individuals did not have to disinherit a spouse or create complex estate plans to maximize use of each spouse's Exemption. Portability was a temporary feature scheduled to expire at the start of 2013. With the 2012 Tax Act, legislators have made the pro-taxpayer Portability feature a permanent part of the Tax Code.
  • Generation-Skipping Transfer Tax ("GST Tax") Exemption - Unchanged. Similar to the Estate and Gift Tax Exemption, under the 2012 Tax Act, the amount that a person can pass to a grandchild (or similar generational skip) free of GST Tax, known as the GST Tax Exemption, is set at $5 million (indexed for inflation). The GST Tax Exemption for 2013 is scheduled to be $5.25 million ($10.5 million for married taxpayers). The GST Tax Exemption was scheduled to decrease to $1 million if the 2012 Tax Act had not passed.
  • Deductions of State Death Taxes for U.S. Estate Tax - Unchanged. Under the 2012 Tax Act, State Death Taxes continue to be allowed as a deduction in determining the amount that is subject to U.S. Estate Tax.
  • Step-Up in Tax Basis - Unchanged. The 2012 Tax Act did not change the long-time feature under the tax law that allows a beneficiary to "step-up" the tax basis of an inherited asset to its value on date of death. This step-up feature eliminates any pre-death gain associated with inherited assets.

More on the 2012 Tax Act will follow as its details become available.  In the meantime, please call one of the following tax attorneys at MacDonald Illig to discuss how the 2012 Tax Act will impact you and your estate planning goals.

To ensure compliance with requirements imposed by the IRS, we inform you that any federal tax advice contained in this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.