1. Whew: Historic Estate and Gift Tax Exemptions Live On (In American Taxpayer Relief Act)

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    “When the ball fell in Times Square on New Year’s Eve, the $5,120,000 [estate and gift tax] exemptions were reduced to $1,000,000, and the maximum transfer tax rate was increased from 35% to 55%. The portability function expired, so a surviving spouse could no longer use a deceased spouse’s unused exemption… Fortunately, the [American Taxpayer Relief] Act made these changes short-lived.” (Holland & Knight) 

    Phew – that was a close call… On January 1, 2013 – the proverbial 11th hour – Congress put together a “fiscal cliff” plan that restored the historically high $5,120,000 estate, gift, and generation-skipping tax exemption (among other things). 

    What’s the specific impact of the American Taxpayer Relief Act on the estate and gift tax liability of individual taxpayers and their families? Five observations:

    1. You can give it all away without fear:

    “Those who thought they missed the window of opportunity to take advantage of the $5,120,000 exemption with pre-2013 gifts have been given a second chance… Therefore, anyone who did not previously take advantage of the $5,120,000 gift tax exemption should still consider doing so; those who did take advantage of the exemption with pre-2013 gifts should consider whether it makes sense to top-off such gifts with the increased exemption available in 2013.” (Holland & Knight) 

    2. You can use the unused portion of your spouse’s exemption:

    “… the 2012 Act makes the concept of estate tax exemption ‘portability’ permanent. Introduced into law in 2010, portability of exemption permits a surviving spouse to apply the unused estate tax exemption of the first spouse to die to the surviving spouse’s own lifetime or testamentary transfers. (Historically, the first spouse’s unused exemption would have been lost if the first spouse had not created an estate plan designed to use it.)” (Ropes & Gray) 

    3. You’ll pay more for transfers not covered by the exemption:

    “On December 31, 2012, the estate, gift, and GST tax rate applicable to nonexempt transfers was 35%. As of January 1, 2013, those rates increased to 40%… families. Had Congress not acted, the gift, estate and GST tax laws would have reverted to the 2001 rules: a $1,000,000 exemption per donor/decedent and a 55% maximum rate.” (Lowenstein Sandler) 

    4. You can only use the exemption once:

    “The $5 Million credit may be used either to shelter lifetime gifts from the gift tax or to shelter assets passing at death from estate tax.  The amount used during lifetime will directly reduce the amount available to shelter assets passing at death.” (Greenberg Glusker) 

    5. You now know what to expect:

    “Taxpayers now have some reasonable estate tax expectations for the foreseeable future so they won’t be paralyzed by ‘what Congress might do in the future’.” (Sheehan Phinney) 

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    The updates:

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    Further reading:

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