With the “Bush-era” tax cuts due to sunset and the feared “Sequestration” arising from the Budget Control Act of 2011 about to take effect, many feared the broader economic and political implications of such a convergence of momentous events on January 1, 2013, leading to the imprecise yet catchy term “Fiscal Cliff.” In the days leading up to January 1, 2013, many taxpayers concerned with their legacy and estate plans were anxious about the potential tax implications of the failure to reach a compromise. With the January 2, 2013 signing of the American Taxpayer Relief Act of 2012 via autopen by President Barack Obama while vacationing in Hawaii, effectively averting one of the greatest single tax hikes in United States’ history, many are equally concerned about the implications of the compromise.
During the negotiations leading up to the passage of the Senate version of the Legislation, the Estate Tax and Exclusion were subjects of great contention, with Republicans and some Democrats urging that the maximum Estate Tax Rate Remain 35%, with a $5 million exclusion or the complete repeal of the Estate Tax altogether, and the White House advocating for a maximum Estate Tax Rate of 45%, with a $3.5 million exclusion. It is important to note, that in the absence of further legislation the maximum Estate Tax Rate would have reverted to 55% with a $1 million exclusion. The American Taxpayer Relief Act of 2012 represents a compromise with a maximum Estate Tax Rate of 40% and a $5 million exclusion.
The Legislation also allows for permanent portability of the Estate Tax exclusion between spouses; meaning that a surviving spouse may elect to apply the deceased spouse’s unused exclusion (DSUE [Deceased Spousal Unused Exclusion Amount]) to the surviving spouse’s own inter-vivos and testamentary transfers. As a result of the legislation, the Federal deduction for State Death taxes also remains intact.
Another significant change for Estate planning purposes came with the extension and alteration of the Gift Tax Rate and Unified Estate and Gift Tax Exclusion. The previous Gift Tax Rate stood at 35% with a $5 million Lifetime Unified Estate and Gift Tax Exclusion. The passage of the American Taxpayer Relief Act of 2012 raises the Gift Tax Rate to 40% while maintaining the $5 million Lifetime Unified Estate and Gift Tax Exclusion.
With crisis temporarily averted once again, it is time to take stock of the recent hastily crafted compromise and its implications for you, your family and your personal wealth.