Since 1997, the federal estate tax exemption and maximum tax rate have changed every year but three. The exemption has changed eleven times; the maximum rate has changed eight times. Many of these changes have been due to the temporary nature of the tax legislation that Congress have passed and each change came with a specific end date in mind. With each change, estate planning attorneys have been forced to speculate as to where the exemptions and rates would end up after the expiration date of each new law.
But, with the passage of the Tax Relief Act of 2012, it appears this consistent uncertainty is coming to an end. Amongst the many revenue related changes made permanent by this law were permanent extensions of the estate, gift and generation skipping transfer (GST) tax exemptions enacted in 2010. Each exemption will be adjusted for inflation annually and it is estimated that the 2013 exemption will be $5.25 million.
On the tax rate side, the maximum rate for these three transfer taxes was increased from 35% to 40%. In addition, the concept known as portability-the ability of surviving spouse to utilize the unused portion of their deceased spouse’s exemption-was also made a permanent part of the estate tax law. This is a major benefit to couples where one spouse has more wealth than the other.
Beyond the Tax Relief Act, the annual federal gift tax exclusion was increased from $13,000 per beneficiary to $14,000. Coupled with the extension of the lifetime gift tax exemption, this change will allow for further tax-free lifetime gifting.
The changes at the federal level were not matched by a corresponding change to local state estate tax law. In the three states that make up the tri-state area, the state estate tax exemptions remain low (the maximum tax rates are significantly lower than the federal rates). Connecticut ($2 million), New Jersey ($675,000) and New York ($1 million) residents will still need to plan their estates to delay, minimize and possibly eliminate their exposure to state level estate taxes even if their estates are well below the federal exemption amounts
The new certainty to federal transfer tax law does not mean we will not see further changes over the next year. With the Supreme Court scheduled to determine the constitutionality of the Defense of Marriage Act this summer, same sex married couples may see their estate planning options increase if the court strikes down the law. Furthermore, it is clear the President Obama will seek to find additional revenue to help balance the current budget deficit and cut our federal debt. In past budgets, he has indicated a willingness to curb popular estate planning tools such as valuation discounts and complex trusts like GRATs and dynasty trusts to produce revenue. Whether this will be able to pass a Republican controlled House of Representatives remains unclear if not incredibly unlikely.
Regardless of any future changes, the Tax Relief Act of 2012 has allowed estate planners to shift their focus from predicting where the transfer tax exemptions and rates will end up to simply providing our clients with the best possible advice. For that reason alone, the Act is a tremendous help to taxpayers and planners alike.
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