American Taxpayer Relief Act of 2012 How Estate, Gift and GST Tax Law Changes Affect You

American Taxpayer Relief Act of 2012 How Estate, Gift and GST Tax Law Changes Affect You
The February 2013 Riker Danzig Tax and Trusts & Estates Update

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “Act”), which made significant changes to federal estate, gift and generation-skipping transfer (“GST”) tax laws and also modified certain employee benefits related provisions of the Internal Revenue Code (“Code”).

What’s New? The Act increased the maximum estate, gift and GST tax rate from 35% to 40% for transfers in excess of the exemption amount.

What Stayed the Same? The federal transfer tax system remained “unified” –  estate, gift and GST tax exemptions all remain subject to the same $5,000,000 exemption umbrella, as indexed for inflation.  For 2013, the indexed exemption amount increases by $130,000 to $5,250,000 – up from $5,120,000 in 2012.  (The gift tax annual exclusion also got a small bump – up from $13,000 per donee to $14,000.)  And, unlike the prior two tax acts that increased the estate, gift and GST tax exemptions, the new law is not subject to a sunset provision that would automatically reduce these exemptions, so we can have more confidence in estate and gift planning into the future.  

The Act also made “portability” a permanent feature of federal estate and gift tax law.  A surviving spouse will remain able to utilize the deceased spouse’s unused estate and gift tax (but not GST tax) exemption remaining at death.  However, to take advantage of portability, the deceased spouse’s executor must make an affirmative election on the deceased spouse’s federal estate tax return, which must then be filed with the IRS.  In some cases, for a surviving spouse to get the benefit of the deceased spouse’s unused gift and estate tax exemptions, a federal estate tax return must be filed where the filing might otherwise be unnecessary (i.e., because the deceased spouse’s gross estate was less than the federal estate tax exemption amount, now $5,250,000).

What Does It Mean? Most importantly, the Act means that there is some permanency in the federal transfer tax after years of uncertainty.  Given this new and much needed certainty, a number of steps might be considered:





If you have been considering some sophisticated leveraged sale planning (e.g., to “freeze” the value of an asset you think may see significant appreciation), the larger exemption amount can provide additional room to maneuver.  Additionally, those considering transfers of minority, non-marketable interests in closely-held enterprises might expedite this review in case there are limitations placed on discounting these interests in future tax legislation that might arise as part of debt reduction negotiations. 
With interest rates remaining at historic lows, you may wish to consider the continued viability of valuation discounting, including grantor retained annuity trusts (GRATs) and low interest AFR loans.  Short term GRATs remain viable although it is possible that future tax law changes will eliminate this planning. 

While the new law has provided a welcome certainty regarding transfer tax rates and exemption amounts, we can expect that there will be future debate on certain cut-backs of the benefits that we enjoy under current law.  Earlier proposals that might resurface include making all grantor trusts includable in the gross estate of the grantor, requiring GRATs to run for a minimum number of years and/or to result in some minimum amount of taxable gift,  and eliminating certain marketability discounts on inter-family gifts.  Given this possibility, and as noted above, some planning steps may be better considered sooner rather than later.