After the passing of the piece of legislation that has been named the American Taxpayer Relief Act of 2012 on January 2, 2013, the estate tax rules from 2012 were for the most part kept intact.
During 2011 and 2012 the maximum rate of the federal estate tax, the gift tax, and the generation-skipping transfer tax was 35%. Under ATRA 2012, the base $5 million exclusion was kept in place with ongoing adjustments for inflation. This year the exclusion is $5.25 million.
One thing that did change is the top rate of federal asset transfer taxes. Going forward we have a 40% maximum rate rather than a 35% top rate.
The estate tax parameters were given an expiration date under the law estate tax legislation passed in 2010. Under the terms of the American Taxpayer Release Act of 2012 the parameters are said to be permanent because there is no provision included in the law for an automatic change in the estate tax exemption without the necessity of Congressional action. This is the first time since 2001 that has been the case.
However, the term “permanent” is a strong word to use when you’re talking about a contentious issue like the federal estate tax. It’s permanent only in the sense that it will be the law until the next time Congress changes it. After 12 years of uncertainty in the estate tax law, planners were hoping for a period of stability when Congress would leave the estate tax law untouched, allowing more reliable planning to occur. But that is not to be so, apparently.
In early April, 2013, the White House released its so-called Green Book, which includes its budget proposals for the 2014 fiscal year. You guessed it — the Green Book includes an increase in the estate tax rate and a reduction in the exclusion that would take effect in 2018. These measures have the effect of increasing estate taxes for many Americans, as the new exemption level would reduce to $3.5 million per person, and the inflation adjustment would no longer apply. Also, if this proposed budget would be adopted, the top estate and gift tax rate would increase to 45%.
It seems as if the word “permanent” in the context of estate taxation now means only 5 years!
While a $3.5 million estate tax exemption would still mean that the estate tax would not be an issue for most Americans, the drop in the exemption would make the tax applicable to many Americans who thought they no longer needed to plan for the estate tax under ATRA 2012. This may cause unexpected taxes for those who are caught unawares becauuse they don’t plan.
Also, an estate today that is less than the exemption rate will not necessarily always be “under the radar”. Increases in asset value due to capital appreciation and current yields that are reinvested can add to an estate value. Additional savings and investments from current income will do so as well. Plus inherited assets from parents and grandparents can be a factor.
The 2014 budget proposal would cahnge the tax law in 2018, which is a few years off. But because the estate tax is obviously still up for discussion in Washington, it is not out of the question that a change could occur earlier as Congress seeks to reduce the huge federal budget deficit. If that is the case, then American should take action and plan before Congress reduces the exemption — and strips away other valuable planning options also included in the Green Book — would be important. There are great tools that can be used to lock in the current historically high exemption amount and shelter significant wealth as well as the appreciation in value of that wealth, from estate taxation.