Congress loves acronyms!  On January 1, Congress passed ATRA which extends (and makes permanent) the $5,000,000 + inheritance tax exclusion amount, the coupling of gift and estate tax, and the portability of the inheritance tax exclusion between spouses.

Under ATRA, the consequences of falling off the “fiscal cliff” were averted.  Also, many of the sunset provisions in our prior laws have been removed, making those laws permanent—at least until Congress passes a bill specifically changing them.

This is very good news for clients and others who resisted the temptation to jump on the year-end gift-giving bandwagon.  In our opinion, the 2012 year-end estate tax frenzy was good for a few, but done by many.  Those individuals who did not take the leap now have time for a deliberate, cautious approach to estate tax planning.

Here are some of the key provisions of the bill as it relates to estate taxes:

• The $5 million exclusion amount, adjusted for inflation, was made permanent.  It does not expire. After adjusting for inflation, it is expected to be $5,250,000 in 2013.  This is the amount every individual may gift or bequest without the imposition of federal inheritance tax.  (California has no estate tax.)
• The estate tax exclusion remains coupled with the gift tax exclusion.  It is a unified transfer tax exclusion.  In other words, the exclusion may be used to offset gifts during a person’s lifetime or bequests upon death, or any combination of gifts and bequests up to the amount of the exclusion, i.e., $5,250,000 for 2013.
• The exclusion remains portable between spouses.  If a spouse has not utilized his or her entire exclusion upon death, the remaining exclusion is available for the surviving spouse, to be added to the surviving spouse’s exclusion.  For example, if a person dies in 2013 without utilizing any of his or her exclusion, the surviving spouse would have a $10,500,000 exclusion (or more, depending on the surviving spouse’s exclusion amount at the time of his or her death) to use during the surviving spouse’s life or upon his or her death.  Please note, however, that to obtain a spouse’s exclusion, an election must be made on a timely filed estate tax return for the deceased spouse.  It is not automatic.
• The top transfer tax rate is now 40%, rather than the 35% provided in prior law.
• The generation skipping transfer tax (“GST”) exemption is $5,000,000, adjusted for inflation.  The GST tax captures gifts and bequests where a generation is skipped (such as a gift from a grandparent to a grandchild).  As with prior law, the GST exemption is not portable.  With a married couple, traditional estate tax planning techniques, such as a credit shelter trust, may be utilized to preserve each spouse’s exemption.
• As with prior law, state estate taxes are deductible on the federal estate tax return. (Again, California has no estate tax.)

Other provisions of ATRA may be discussed in future blogs.  Should you have any questions about the above content, please contact William L. Cates.

Please be advised that the information provided above is general in nature and is not intended to constitute tax, legal or other professional advice.  Each person’s particular situation is unique and requires specific review and analysis before advice can be provided.

Author: William L. Cates