The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 substantially modified the laws regarding the estate tax, gift tax, and generation-skipping transfer tax and extended the Bush-era tax cuts for two years. At the conclusion of 2012, the Act sunsets and we will face the same uncertainty in 2013 that the Act was meant to address in 2011.
Current provisions specifically related to estate taxes, gift taxes, and GST taxes include:
- Estate Tax Exemption and Estate Tax Rate. The estate tax exemption amount for decedents dying in 2012 is $5.12 million. The maximum federal estate tax rate is reduced to 35 percent.
- Gift Tax Exemption and Gift Tax Rate. The Act reunified the gift tax with the estate tax, providing an applicable lifetime gift tax exemption of $5.12 million in 2012 and a top gift tax rate of 35 percent.
- Generation-Skipping Transfer Tax. The GST exemption is $5.12 million and the GST tax rate for transfers made in 2012 is 35 percent.
- Portability. Effective for estates of decedents dying after Dec. 31, 2010, the Act allows the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse. In other words, the Act makes the estate tax exemption "portable" between spouses.
Uncertainty After Dec. 31, 2012
If Congress does not act, the transfer tax laws will revert to 2001 levels—$1 million ($2 million for a married couple) estate tax exemption, gift tax exemption, and GST exemption with a 55 percent top tax rate. In addition, the GST exemption will be indexed for inflation and the estate tax exemption will not be "portable" between spouses.
If Congress does act, the law may not be as favorable. On Feb. 13, President Obama released his budget proposal for 2013, which provides in part:
- $3.5 million ($7 million for a married couple) estate tax exemption and GST exemption with a 45 percent top tax rate; and
- $1 million ($2 million for a married couple) gift tax exemption with a 45 percent top tax rate.
Congress may limit the use of grantor retained annuity trusts and family limited partnerships.
- Grantor Retained Annuity Trusts. There have been recent legislative proposals that would prohibit grantor retained annuity trusts without at least a 10-year term and a remainder with some reportable value (that is, short-term "zeroed-out" grantor retained annuity trusts would not be allowed).
- Family Limited Partnerships. There is also concern that valuation discounts may not be allowed for non-operating family entities (that is, family limited partnerships).
There is no guarantee that the current exemptions and tax rates will continue to be available after Dec. 31. If you have excess assets that you can afford to live without, you may wish to consider making large gifts to your loved ones by the end of 2012. By making gifts this year, you can shelter assets from federal gift, estate, and GST taxes.
Strategic use of the gift tax exemption and GST exemption now can create significant wealth-transfer tax savings and the opportunity for additional wealth accumulation for (i) children and, if desired, (ii) subsequent generations for years to come, free of additional estate taxes, gift taxes, and GST taxes with the use of a trust. A gift to a trust also provides creditor protection and may limit or control the access a family member/beneficiary may have to the funds placed in trust.
Also with grantor retained annuity trusts and family limited partnership techniques still available, they should be considered and used as appropriate in conjunction with the other gifting techniques.