“Fiscal Cliff” Legislation Makes $5 Million Federal Estate Tax Exemption Permanent

The so-called “fiscal cliff” legislation enacted last night by Congress made a number of substantial changes to our laws. The new law, called “The American Taxpayer Relief Act“, restored the 39.6% income tax rate for high-income households, increased the capital gains tax rate to 20% for singles with incomes above $400,000 and married couples with incomes above $450,000, extended the Bush-era income tax rates on middle-class families, and extended Unemployment Insurance benefits for one year, among other things. A White House summary of the legislation is attached.

The “fiscal cliff” bill also made significant changes to the estate tax code. What we know so far follows:

  • Many provisions in the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRUIRJCA”), passed two years ago, are made permanent. That is, the bill sets the amount exempt from federal estate taxation at $5 million per person and $10 million per couple. The federal exemption amounts are indexed for inflation, so the 2013 exempt amount will be $5.12 million for an individual and $10.24 million for a couple, plus inflation adjustment. The federal estate tax exemption for an individual adjusted for inflation has been projected to be $5,250,000 for 2013.
  • The gift tax and generation-skipping transfer tax exemptions established under TRUIRJCA also remain the same, meaning that $5.12 exemption for 2013 applies to all, adjusted for inflation.
  • The estate and gift tax systems remain unified under the new law, meaning that the $5 million per person estate tax exemption could be used to offset taxes due on lifetime gifts and/or bequests.
  •  The new law raises the tax rate on the wealthiest estates – worth more than $5 million per person – from 35 percent to 40 percent.
  •  Portability of unused estate tax exemption remains part of the law. The new law allows the executor of a deceased spouse’s estate to transfer any of the $5 million tax exemption that was not used after the death of the first spouse to the surviving spouse with no prior estate or tax planning.

The White House summary of the “fiscal cliff” legislation is attached- White House Tax Agreement Fact Sheet

The new law can be found here – The American Taxpayer Relief Act

As confirmed by a former inspector for the Internal Revenue Service, “You could say [The American Taxpayer Relief Act] eliminates the estate tax for 99 percent of the population, though I’ve seen figures that say 99.7 or 99.8.” (Article in the January 4, 2013 edition of the NY Times) In my opinion, the American Taxpayer Relief Act is good news (for rich folks), but also bad news (for American lawyers who do estate tax planning). The federal estate tax is basically gone – only 1,770 estates per year will have any federal estate taxes owed in a country of 311,000,000 people. In 30 years of practicing law, I have had few (if any) clients who have had the amount of wealth to need “estate tax planning” at the level of exemption set by the new law – the lifetime gift and estate tax exemption are $5 million per person, with annual adjustments for inflation. Married couples may combine their exemptions to pass double that amount – $10 million, FREE of federal estate taxes. Annual inflation adjustments, built into the law, will increase the exempt amounts. In New Jersey, we have a State estate tax which averages about 10% tax rate, above a $675,000 exemption which the State does not have plans to increase.  However, based on the substantial increase in the federal exemptions, I don’t believe estate tax lawyers have a long-term future in the estate tax-planning business.