Teetering on the brink of the “fiscal cliff,” Congress finally voted to come to a partial compromise. About two hours into the New Year in Washington, the Senate voted 89-8 to pass H.R. 8, the “American Taxpayer Relief Act.” Late into the evening of the same day (January 1, 2013) the House of Representatives followed suit and voted 257-167 to pass the measure. President Obama has indicated that he will sign the legislation.

From an estate tax perspective, the measure makes permanent all of the provisions of TRA 2010, except the rate. In other words, there is an exclusion of $5 million, adjusted for inflation. Thus, for 2013, the exclusion is $5.25 million. This is “unified” with the gift tax and may be used at death or during lifetime, with lifetime use subtracted from the amount remaining for use at death. The tax rate is capped at 40% rather than the 35% provided in prior law.

The “portability” provision is similarly retained by the new law. Thus, the exclusion amount of the first spouse to die may be used by the surviving spouse, assuming an estate tax return is filed for the pre-deceasing spouse.

GST exemption is also set at an inflation-adjusted $5 million. However, as with prior law, GST exemption is not portable. Thus, in order to preserve the GST exemption of the first spouse to die, the use of a credit shelter trust is needed. Of course, the use of a credit shelter trust is also advisable to provide remarriage protection and other benefits.

State estate taxes are deductible (no credit), as with prior law. The legislation did not address several items which the Administration has on its wish list. (For example, the Administration has wanted to limit GRATs by imposing a minimum term and has wanted to have GST exemption expire after 70 years.)

On the income tax side, the tax rates on income below $400,000 (for single filers, $450,000 for married filing jointly) have been made permanent at their current level. The tax rate for income above that level will rise from 35% to 39.6%, the rate pre-2001. Further, qualified dividend and capital gain income tax rates will be going up from 15% to 20% for that same group but will remain at their current levels for those with income below that amount.

The “charitable rollover” IRA provisions have been extended for years 2012 and 2013 only. Thus, an individual over age 70 ½ can give up to $100,000 from an IRA without taking the amount into income. This can be important for some taxpayers because the charitable deduction otherwise may be capped or not fully offset the income.

As to the spending side, the “sequestration” cuts which were to begin on January 1^st have been delayed by two months. In order to avoid spending cuts embodied in the sequestration, the tax legislation embodied in the “American Taxpayer Relief Act” may have to be revisited. Thus, what is “permanent” under the American Taxpayer Relief Act may not end up being quite as permanent as we have been lead to believe.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com