Estate Tax Certainty…For Now

NB: For information on the state of the estate tax in light of the Tax Cut and Jobs Act, click here.

For more than a decade, the estate tax was in a state of flux.

Estate Tax Uncertainty

In 2001, estate taxes of up to 60 percent were due on estates valued at over $675,000. The tax cuts passed under President George W. Bush gradually increased the exemption and decreased the tax rate, culminating in the repeal of the estate tax in 2010. The repeal was only temporary and scheduled to be reinstated on January 1, 2011 for estates valued at over $1 million.

A last minute compromise on December 17, 2010 resulted in the Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The new law set the estate tax rate at 35 percent for individual estates valued at over $5 million. But again, this law was temporary and set to expire on December 31, 2012. So at the end of last year, we faced estate tax uncertainty again, which made estate planning all the more difficult.

A Last Minute Deal

Thankfully, Congress passed a tax compromise on January 2, 2013. Without a compromise, estates valued at over $1million would have been subject to an estate tax of up to 60 percent.

The American Taxpayer Relief Act of 2012 sets the estate tax rate at 40 percent for individual estates valued at over $5 million, indexed for inflation. It is estimated that those who die in 2013 can exclude about $5.25 million dollars. It also:

1. Maintains portability of the estate tax exemption between spouses. Any part of the estate tax exemption that has not been used by a predeceased spouse can be transferred to the surviving spouse for use in addition to the surviving spouse’s exemption.
2. Maintains the unification of the federal estate and gift taxes so that the gift tax exemption and the maximum tax rate is equal to the federal estate tax exemption and the maximum tax rate.
3.  Sets the generation-skipping tax rate at 40 percent for estates valued at over $5 million, indexed for inflation.

Additionally, the new law is permanent, which means we have federal estate tax certainty, at least for now.

For now? But isn’t the new federal estate tax law permanent?

The new law is permanent in that it does not have a sunset provision that will cause it to expire automatically. However, it does not prevent Congress from passing new legislation altering it in the future.

So as it stands, we have federal estate tax certainty, until Congress changes its mind.