On January 1, 2013, Congress passed the American Taxpayer Relief Act to address some of the fiscal cliff issues. This new Tax Act results in significant changes in the Estate and Gift Taxes over what the law would have been had this act not been passed. The act makes the 2001 “Bush” tax cuts, as modified in 2010, essentially permanent, with minor changes.
The good news is that the estate tax law is now permanent; that is, it’s provisions do not automatically expire in the future. Finally there is some certainty in the law for estate planning.
Some key points of the new Act which may affect estate planning are as follows:
Legislation passed in 2010 temporarily set the gift and estate tax exemption at $5 million with the excess above $5 million taxed at 35%. Had the 2013 Tax Act not been passed, the estate tax exemption in 2013 would have reverted to $1 million with the excess taxed as high as 55%.
The $5 million gift, estate, and generation skipping transfer tax exemptions that were temporarily enacted, are now set. Moreover, the exemption amounts are permanently indexed for inflation after 2011. The exemption after being indexed for inflation should be approximately $5.2 million for decedents dying in 2013.
The excess over the $5,000,000 exemption amount will have a maximum tax of 40% rather than the 55% rate.
Although not a part of the new Tax Act, it is worth mentioning that the annual gift tax exclusion, which is also adjusted periodically for inflation, has been increased from $13,000 in 2012 to $14,000 in 2013. Thus, each person can gift up to $14,000 each to an unlimited number of persons, and without the requirement to file a gift tax return.