Recent Gift and Estate Tax Changes

By | January 10, 2016

Overview of the new law. The 2012 Taxpayer Relief Act made permanent many estate, gift and GST tax provisions, including the ability to transfer any unused estate exemption amount between spouses (referred to as “portability”), that were due to expire on Dec. 31, 2012. The Act also increased the maximum estate, gift and GST tax rate to 40%. Higher rate and higher exemption for 2013. For estates of individuals dying and gifts made in 2013, the top transfer tax rate is 40%.


Old GST Tax Rates

Before the 2012 Taxpayer Relief Act, the top rate was to rise to 55% for estates of individuals dying and gifts made after 2012. So, although the 40% rate is less beneficial than 35% rate applicable for 2012 transfers, it is much better than the 55% rate that would have existed if Congress had not taken action. Further, the 2012 Taxpayer Relief Act made permanent the $5 million exemption from 2011, adjusted annually for inflation. The exemption amount is $5.25 million in 2013, which is far more advantageous than the $1 million exemption that was expected to apply in 2013 in the absence of new legislation.


GST tax changes made permanent.

GST tax changes made permanent. The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2012 Taxpayer Relief Act prevented the GST exemption amount from returning to $1 million (which would have been adjusted for inflation and been $1.36 million in 2013). Instead, the Act increased the maximum GST tax rate to 40%. Additionally, the Act made permanent many of the technical provisions that were set to expire, including those regarding automatic and retroactive allocation of GST exemption in some circumstances, valuation in determining the inclusion ratio, qualified severances, and relief for late elections Continuation of portability.


Portability Provisions for Surviving Spouse Estate Tax

The 2012 Tax Relief Act also made permanent the election for a surviving spouse to use any exemption that remains unused as of the death of the first spouse, in addition to his or her own $5.25 million exemption (the exemption amount for 2013) for taxable transfers made during life or at death. If this portability feature had expired at the end of 2012 as was scheduled, the exemption of the first spouse to die would have been lost if not used, or if proper planning (such as the creation of a credit shelter trust) was not done.

What is the Portability of Estate Tax?

While this portability rule may make credit shelter trusts unnecessary in some cases, credit shelter trusts can be beneficial because they may shield some appreciation from estate tax and offer protection from creditors. Note that the transferred exemption may be lost if the surviving spouse remarries and is again widowed. Conclusion. The 2012 Taxpayer Relief Act made many estate, gift and GST tax rules permanent by repealing the sunset language that was in place in previous legislation, and thereby eliminated the uncertainty as to what the state of transfer tax law would be in 2013 and beyond. Although benefits such as the large exemption amount and portability remain and protect significant assets from transfer tax,