On January 3, 1013 the American Taxpayer Relief Act was signed into law. The estate tax has been in a state of flux since 2001. The new Act makes permanent the 2012’s federal estate tax exemption of $5 million, adjusted annually for inflation. This basically eliminates the estate taxes for most of the population. If Congress had not acted, Estates above $1 million would have been subjected to federal estate taxes beginning in 2013. This would have been a significant change for estate planners and individuals. In 2000, $675,000 was the amount free of federal estate taxes. If you owned property worth more than $675,000 then your estate planner would have suggested doing some estate planning. After 2001, pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001, the $675,000 (with a 55 percent tax for anything above that amount) exemption increased in increments. In 2002 and 2003 the exemption was $1 million. In 2004 and 2005 the exemption was $1.5 million and in 2006 through 2008 the exemption was $2 million. In 2009 the exemption was $3.5 million.
In 2010, contrary to what I believed would happen the estate tax disappeared. That year Congress and the President were unable to reach an agreement on the tax, so there was no estate tax for deaths occurring in 2010. The Tax Act was supposed to sunset in 2010 and revert back to the pre-act amount of $1 million. Congress acted and the 2010 Tax Relief Act was enacted and provided a temporary stay of the sunset and the amount was set to $5 million. Once again, however, the $1 million was to take effect in 2013.
So, now the 2012 act permanently sets the estate tax exemption amount at $5 million per person, plus the added bonus of an inflation calculation. Given that the exemption was going to return to $1 million in 2013 with a 55 percent tax rate above that, many took advantage of gifting the maximum annual gift tax exemption, before the year ended. Now that the act has passed, those generous people may now be feeling some regret that they gifted more than they could actually afford to gift.
Because of this change, for individuals with assets below $5 million, estate planners will have to consider other aspects other than tax considerations. Gifting will also be considered in a different light, as the annual gift tax exclusion of $14,000 ends in 2013 and individuals may no longer have the advantage of reducing their future estate tax. Of course, those with ultra high net worth will still be affected by the federal estate tax.
Written by Anna M. Petronzio.