United States: Fiscal Cliff Averted: Estate, Gift And GST Tax Changes

The country was heading for a "fiscal cliff" as the Bush-era tax cuts were scheduled to expire on January 1, 2013.  But the U.S. Senate and House of Representatives voted in the final hours to make those tax cuts permanent for taxpayers with adjusted gross incomes of less than $400,000 (less than $450,000 for married couples filing jointly). 

With an adjustment for inflation, the new law (named "The American Taxpayer Relief Act of 2012") leaves taxpayers' exemptions from estate tax, gift tax, and generation –skipping transfer (GST) tax unchanged from their 2012 levels.

The maximum tax rate, however, for all of these taxes has increased from 35% in 2012 to 40% in 2013. 

The exemption amounts listed above are indexed for inflation.  But we are no longer living in the shadow of exemptions that are scheduled to expire and revert to some lesser amount.  These exemptions are now "permanent" – which should make estate planning more certain for the foreseeable future. 

In addition, when Congress extended the Bush-era tax cuts in 2010, it added the new idea of "portability" to federal estate and gift tax law.  In general, "portability" allows a surviving spouse to use the unused portion of his or her predeceasing spouse's exemption from estate tax if proper documentation is filed at the time of the first death.  The new law keeps "portability".  (Please note, however, that there is no portability for state estate taxes or for the GST tax, so while portability may offer relief in some circumstances, it is not a substitute for estate tax planning.) 

Finally, the Obama Administration had proposed several other changes to federal gift and estate tax law, such as eliminating valuation discounts for certain types of family limited partnerships (FLPs) and limiting the terms of grantor retained annuity trusts (GRATs).  But none of these are included in the new law.