The new American Taxpayer Relief Act passed December 2012 finalized the Federal Estate Tax laws after 11 years of uncertainty that began with the Bush Tax Cuts in 2001.
During these 11 years of uncertainty, the Estate Tax was temporarily repealed for one (1) year (2010), the value of assets that each individual could transfer to beneficiaries free of Estate and Gift Taxes (and Generation Skipping Transfer Taxes) rose from $1 million to $5 million (indexed for inflation), the top Estate and Gift Tax rates fell from fifty-five percent (55%) to thirty-five percent (35%), and the Annual Exclusion rose from $10,000 per year, per individual to $13,000 per year, per individual.
Prior to the passing of the new American Taxpayer Relief Act of 2012, all of the foregoing tax breaks were going to expire and the Estate and Gift Tax laws in existence before the Bush Tax Cuts were to set to return on January 1, 2013.
With the passing of the American Taxpayer Relief Act of 2012 (ATRA), a return to the Gift and Estate Tax laws as they existed in 2001 was avoided and the Federal Gift and Estate Tax laws appear to be finalized for the foreseeable future. The final Gift and Estate Tax laws are as follows:
1. The value of assets (after deductions) that each individual can pass to their family free of Estate and Gift Taxes is $5 million (indexed for inflation) (for a total of $10 million for husband and wife) (the “Exemption”);
2. Surviving spouses can add the deceased spouse’s unused Exemption to the surviving spouse’s Exemption allowing the surviving spouse to shelter more than $5 million of assets from Estate and Gift Taxes upon the surviving spouse’s death. This tax benefit, which was also available for decedents dying in 2011 and 2012, is commonly referred to as “portability”;
3. The value of assets that each individual can pass to a skip generation (i.e., grandchildren) free of GST Taxes is $5 million (indexed for inflation);
4. The top Estate and Gift Tax Rate (and GST Tax Rate) is forty percent (40%); and
5. The Annual Exclusion (the amount each individual can gift each year without reducing the individual’s $5 million Exemption) is $14,000 per year, per individual.
Additional provisions of ATRA include the following: maintaining the tax rates for individuals earning less than $400,000 (and $450,000 for married filing jointly); increasing the income tax rates for individuals earning more than $400,000 (and $450,000 married filing jointly) from 35% to 39.6%; increasing the Long Term Capital Gains Rates from 15% to 20% for taxpayers in the 39.6% tax bracket; reducing personal exemptions and limiting itemized deductions for taxpayers with Adjusted Gross Income in excess of $250,000 (single) and $300,000 (married filing jointly).