Enacted by Congress on January 1st and signed into law by President Obama on January 2, 2013, the American Taxpayer Relief Act of 2012 (the “Act”) negates the reduction in estate, gift and generation-skipping transfer (“GST”) tax exemptions that were scheduled to take effect at the beginning of this year, and retains many of the favorable tax provisions that were scheduled to expire at the end of 2012.
Specifically, the estate and gift tax exemptions will continue to be “unified,” and the exemption amounts for gift tax, estate tax and GST tax will all remain at $5 million, indexed for inflation from 2010. Based on IRS inflation factors, the estate, gift and GST exemptions for 2013 are estimated to be $5.25 million. These exemptions are considered “permanent,” in that the law does not provide for a reduction or phase-out of the exemptions after a certain period of time; but Congress can always amend the law (and certainly has evidenced a willingness to do so in the past).
The Act also preserves the “portability rules,” which allow the estate of a predeceased spouse to transfer any unused estate tax exemption to his or her surviving spouse (who can then use it to shelter either lifetime gifts or bequests from tax).
The only change from prior law is an increase in the estate, gift and GST tax rate from 35 percent to 40 percent.
Although only one state-Connecticut-currently imposes a state-level gift tax, some pundits are predicting that other states may follow suit and enact their own gift taxes, given the permanency of the exemptions under the Act.
For those clients who made large taxable gifts in 2012 in anticipation of a reduction in the exemptions, those gifts were not made in vain. By transferring assets out of their names in 2012, all subsequent appreciation in those assets will be removed from their estates for estate tax purposes. In addition, each year, the gift tax exemption will increase slightly over the amount available in the previous year. For example, married couples who have fully utilized their exemptions in 2012 will have an additional $260,000 of exemption from gift tax available to shelter lifetime gifts in 2013.
If you have any questions regarding this Bulletin, please contact Hume Steyer (212-574-1555) or David Stutzman (212-574-1219) of our Trusts and Estates Group.
