American Individual Relief Act of 2012 Effect on 2013 and Future Estate Tax Planning (Part 3)

The 2012 Act raises taxes on some individuals while retaining most of the provisions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” generally referred to as the “Bush tax cuts”) and the two-year extension of EGTRRA enacted at the end of 2010.  Although as we discussed in the Article I, most of the changes introduced by the 2012 Act relate to income tax; however, there are important changes to the gift, estate, and generation-skipping transfer tax provisions as well.

Under the 2012 Act, the gift, estate, and generation-skipping transfer tax provisions of Internal Revenue Code are now “permanent,” meaning that the sunset provisions of EGTRRA have been repealed. This also means that the current law has no expiration date at this time. The $5 million exemptions for the gift tax, estate tax and the generation-skipping transfer tax (collectively, the “transfer taxes”) are still provided and will now be indexed for inflation. The exemptions are indexed to $5.25 million this year, 2013, so that individuals who gave away the full $5.12 million in 2012 can still give an additional $130,000 this year sheltered by the gift tax and/or generation-skipping transfer tax exemptions! To the extent that gift tax or estate tax is incurred under the 2012 Act, the top marginal rate was increased from 35% to 40%. In addition, “portability,” which permits a surviving spouse to use any unused estate tax exemption of the deceased spouse, has been made permanent.

Also noteworthy for this year is that the annual exclusion amount, the amount of an annual gift each individual can give to an unlimited number of persons without needing to report the gifts to the Internal Revenue Service, has increased due to inflation and is now $14,000 per donee.  A word of caution here:  not all gifts qualify for the gift tax annual exclusion.

Despite the fact that the 2012 Act eliminated the uncertainty arising out of the EGTRRA sunset provisions, there are pending legislative proposals by the Obama administration to reform the transfer tax laws in a manner that will limit the planning options currently available to individuals.   Possible changes include: (i) limiting or eliminating minority discounts for family companies or partnerships; (ii) limiting the number of generational transfers of assets held in trust which can be sheltered by the GST exemption; (iii) limiting the benefits of grantor trust status of a trust; and (iv) mandating a minimum 10-year term for grantor retained annuity trusts.  As of the date of this writing, I do not yet know when or if Congress will take up the question of tax reform, and it is not clear whether fiscal issues are going to be a recurring item on the Congressional agenda this year in the debt ceiling debate and any negotiations over the sequester.

Those individuals who wish to take advantage of the planning opportunities under this current law, that may be eliminated, and/or who wish to use their unused portion of the increased exemption amounts by making gifts this year should do so promptly because of the risk of additional changes to the tax code yet within this year.  Making annual exclusion gifts in 2013 would also be beneficial allowing for the completion of gifts now to allow enough time to carry out whatever steps may be necessary to complete the gifting.