The American Taxpayer Relief Act of 2012 (“Taxpayer Relief Act”) has been signed into law by President Obama in 2013. The Taxpayer Relief Act makes permanent changes to the estate, gift and generation-skipping tax provisions.
Brief History. The Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Tax Act”) phased-out the estate and generation-skipping transfer taxes so that those taxes were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. Prior to the 2001 Tax Act, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or transfers upon death. The 2001 Tax Act “decoupled” these systems so that the gift tax exemption remained at $1 Million dollars while the estate tax exemption increased (eventually up to $3.5 Million). In 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Act”) set the exemption at $5 million per person with a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount was indexed beginning in 2012. In addition, the 2010 Tax Act reunified the estate and gift taxes until December 31, 2012.
Permanent Relief and Unification. The Taxpayer Relief Act retains the 2010 Tax Act $5 million per person exclusion amount and indexes the exclusion for inflation going forward. However, the top tax rate is increased from 35 percent to 40 percent for estates of decedents dying after December 31, 2012 and for taxable gifts (gifts above the exclusion amount). The Taxpayer Relief Act permanently extends unification and is effective for gifts made after December 31, 2012. Therefore, the estate, gift and generation skipping tax exclusion is $5 million per person, indexed for inflation.
Portability of unused exemption. The 2010 Tax Act allowed the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse for estates of decedents dying after December 31, 2010 and before December 31 2012. The Taxpayer Relief Act makes permanent this provision and is effective for estates for decedents dying after December 31, 2012.
This is a very basic summary of the estate, gift and generation skipping provisions of the Taxpayer Relief Act . Although we referred to “permanent” relief, tax laws are often changed, but it appears that we will have a consistent set of rules to apply for the foreseeable future. If you have any specific questions as to how the Taxpayer Relief Act may affect your estate plan, please contact one of our estate planning attorneys at Dawda, Mann, Mulcahy & Sadler, PLC at 248-642-3700.