On January 2, 2013, the American Taxpayer Relief Act of 2012 (the “2012 Tax Act”) was signed into law. Under the 2012 Tax Act, the top federal estate, gift and generation-skipping transfer (GST) tax rate is 40%, representing an increase from the prior top rate of 35%. However, the 2012 Tax Act also made permanent the $5 million federal estate, gift and GST tax exemptions originally enacted in 2010, indexed for inflation. This means that if an individual dies with assets worth less than $5.25 million in 2013 ($5 million indexed for inflation) and has made no taxable gifts during his or her life, such person’s estate will not be subject to federal estate tax. This rule also means that an individual may make up to $5.25 million of gifts during his or her life without paying gift tax, though taxable gifts during life reduce the federal estate tax exemption available at death. The inflation-indexed $5 million exemption is the highest exemption in history. For example, as recently as 2001 the estate and GST tax exemption was $675,000 per person.
In addition to the 2012 Tax Act changes, the federal gift tax annual exclusion increased from $13,000 in 2012 to $14,000 in 2013. As a result, any individual may gift up to $14,000 to another person without having to file a gift tax return or use any portion of the donor’s lifetime gift tax exemption (now $5.25 million).
While the 2012 Tax Act has been described as “permanent,” it is always impossible to predict what Congress might do. However, unlike previous major federal estate tax legislation, the 2012 Tax Act is not scheduled to expire or change at a later date. That said, there have been discussions in Washington, D.C. about restricting certain advanced estate planning strategies, including valuation discounts for closely-held business assets and grantor retained annuity trusts (GRATs). We would be happy to assist you in determining the estate planning strategies most appropriate for your situation.