Early Reflections on the New Estate Tax Laws – H.R. 8

January 11, 2013

After having a chance to reflect on the estate tax changes that were enacted by Congress on January 1, 2013, I wanted to set down my own thoughts on the changes as well as those of other professionals who deal regularly with the federal estate and gift tax.

This letter is directed especially to those of you who made substantial gifts during 2011 and 2012 to take advantage of the $5 million gift tax exemption and who might now be having second thoughts about having done so. It is also addressed to those of you who are still interested in making substantial gifts as part of your overall estate plan.

The estate tax exemption was scheduled to decrease on January 1, 2013 from $5.12 million per individual to only $1 million per individual., and the estate tax rate for amounts in excess of $1 million would have increased from 35% to 55%.

Under the new law, the estate tax exemption remains at $5.12 million per individual ($10.24 million for married couples), and is now indexed for inflation. The lifetime gift tax exemption is $5.12 million per individual, indexed for inflation. The Generation-Skipping Transfer (“GST”) tax exemption is $5.12 million.

The tax rate on estate, gift or generation-skipping transfers in excess of the exemption amount was increased from 35% to 40%.

The estate tax exemption is “portable” meaning that if the exemption of the first spouse to die does not have to be fully utilized to eliminate the estate tax, any unused portion of the first spouse’s exemption can be used by the estate of the surviving spouse (in addition to the survivor’s own exemption) provided a federal estate tax return is timely filed for the first spouse’s estate. The generation-skipping tax exemption is not portable, and the unused portion of the first spouse’s GST exemption cannot be used by the surviving spouse.

The gift tax annual exclusion is $14,000.00 in 2013. $14,000.00 is the maximum that a donor can transfer every year before reducing the donor’s lifetime exemption. A donor can transfer $14,000.00 to each of as many people as he or she wishes.

The new law extends the IRA charitable rollover through 2013. Individuals who are older than 70 1/2 can transfer up to $100,000.00 directly from their IRA to a charity during 2013. There is also a special tax break that allows seniors to give an additional $100,000.00 before February 1, 2013 from their IRAs to a charity. Thus seniors can give up to $200,000.00 to charity from an IRA in 2013, but the first $100,000.00 must be given before the end of January 2013.

Are these changes “permanent”?

In the days following the adoption of these new laws, a number of commentators hailed the fact that the changes were “permanent” and that there is now certainty or predictability in estate tax planning once again. However, as Hani Sarji points out in his excellent article “Estate of Confusion” in the January 6, 2013 online issue of Forbes, these tax changes are being called permanent simply because there is no sunset provision in the new law that would cause the current rules to expire, such as was the case with the Bush Tax Cuts of 2001 (which expired in 2010) and the new tax laws of 2010 (which expired at the end of 2012).

The following excerpt from Sarji’s article is particularly pertinent:

“A permanent law means ‘we may have some concrete planning guidance moving forward,’ write Jeffrey Levine & Jarrod Trexlar in the Slott Report. But a ‘permanent’ change does not mean the law will never change (again). ‘Remember that the word ‘permanent’ really means ‘until they change it next time” cautions Stephan J. Oshins, an estate planning attorney in Nevada.

“Similarly, Ron Aucutt, partner at McGuire Woods writes, ‘”Permanence” is welcome. But that welcome relief lasts only until Congress decides to change it. With the important and intense debates that Congress has before it, it would be naïve to assume that Congress is done making changes to the tax law, even to the estate tax.’

“Stephen C. Hartnett, Associate Director of Education, American Academy of Estate Planning Attorneys, agrees: ‘As to the spending side, the ‘sequestration’ cuts which were to begin on January 1 have been delayed by two months. In order to avoid spending cuts embodied in the sequestration, the (tax legislation that was just enacted) may have to be revisited. Thus, what is ‘permanent’ under the (new law) may not end up being quite as permanent as we have been led to believe.'”

“The take-home message is that estate planning should not be delayed. ‘True, you’ve been given a bit of breathing room on planning, but don’t squander it. The bottom line for everyone is that now is the time to act…,’ advises Martin Schenkman, a New Jersey estate planning attorney.”

My own feeling has been similar to this for the last number of years. As long as the estate tax remains a political football passed between one party that seeks to abolish it and the other party that wants to increase it, I am extremely pessimistic that there will ever be a permanent resolution. Therefore, persons whose estates are leas than $5 million should not develop a false sense of security that estate planning is not necessary. The following non-tax reasons for estate planning remain as important as ever:

• Asset protection through trusts and entities;
• Protecting property left to children and grandchildren from divorce and creditors;
• Business succession planning;
• Planning for advanced medical and end-of-life situations; and
• Reviewing beneficiary designations in life insurance policies and retirement plans and coordinating them with your will or living trust.