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New Tax Law Brings More Certainty to Estate Tax Planning

By Toolkit Staff | January 28, 2013

The Death Tax is not dead, but it is certainly not moving around like it once did.

After years of uncertainty from wildly changing estate tax laws, including a brief period when the tax was completely eliminated, small business owners can now make long-term plans for the wealth they have accumulated from years of hard work in their businesses. The recent Fiscal Cliff tax deal that emerged from Congress in early January contained some major estate tax reforms.

One major benefit of the recent changes is that they have ended the scheduled roller coaster ride in the rates and lifetime exclusion amounts for estate tax. Tax planning often turns on the amount subject to tax, the amount that can be shielded from tax, and the tax rate. The key issue during the “estate tax sunset era,” which spanned from 2001 through 2012, was that different rates and exemptions were scheduled to apply depending on the year of death. Since you couldn’t accurately predict the year of death, you didn’t know whether the estate tax bite would kick in at $1 million, $5 million, or somewhere in between. In a situation like this, if your assets from a lifetime of entrepreneurship are worth $4 million, what do you do?

Recent tax reform has brought some certainty to the estate tax, along with higher rates and a continuation of the $5 million lifetime exemption amount, per person, that escapes tax. The good news is that Congress kept the “portability” feature which allows one spouse to use some or all of a predeceased spouse’s lifetime amount, provided the right steps are taken. This article highlights the recent estate tax changes in the American Taxpayer Relief Act (ATRA) so that you can be better informed when talking with your attorney and other professionals about your planning options.

Here’s a summary of the recent roller coaster ride: from 2002 to 2009, the estate tax lifetime exemption amount could be anywhere from $1 million to $3.5 million, depending on the year of death. If you lived beyond 2010, though, it was scheduled to drop to $1 million. After Congress acted in 2010, the amount was generally $5 million for a few years, but it was still scheduled to drop later on to $1 million – a $4 million difference – depending on the year of death. Also, during these years, the top tax rate could be anywhere from 35 to 50 percent, depending, again, on the ever-impossible-to-predict year of death.


Many existing estate plans often contain “formula” clauses, which are tied to hard numbers. But with the estate tax being a moving target in recent years, a good formula could become a bad one overnight. Essentially, the relevant tax law can affect the amount each beneficiary receives. If tax laws change after a plan is put in place, and the plan is never amended to keep up with the changes, it could cause unintended results in terms of who gets what. Talk to your advisor to confirm that your existing plan achieves what you intend it to achieve.

Rates and Lifetime Amounts in 2013 and Beyond

Going forward, the estate tax rates and lifetime exemption are not scheduled to change depending on the year of death. The lifetime exclusion amount is set at $5 million per individual and is adjusted for inflation every year. For example, it went from $5.12 million in 2012 to $5.25 million in 2013.


Even if your wealth is under $5 million (or $10 million for married couple), you’ll still want to check with your advisor to make sure you’re in the clear. State death taxes can kick in at a much lower threshold. Your advisor should also be able to tell you about the income tax implications of your estate plan.

Also, the top estate tax rate is 40 percent in 2013 and beyond, up from the 35 percent rate that we saw in 2010 through 2012. This means more tax due for the larger estates that are subject to tax even after taking advantage of the lifetime exclusion amounts. The gift and generation-skipping transfer taxes, which generally function to prevent you from avoiding the estate tax, are also imposed at a top rate of 40 percent.


If you fail to plan for the estate tax, you could lose out on valuable opportunities to shift wealth to the next generation in a tax-advantaged manner. Talk to your advisor as early as possible about your situation and what strategies may be available to help avoid or minimize tax.

Spousal Portability in 2013 and Beyond

The American Taxpayer Relief Act also preserves the spousal “portability” feature from 2011 and 2012. If a “poor” spouse dies first with little or no assets, the portion of his or her lifetime amount that was never used (called the “deceased spousal unused exclusion amount”) can be added on to the surviving spouse’s lifetime estate and gift tax exclusion amount if the right steps are taken.


Proper steps have to be taken in order to take advantage of the portability feature. Generally, this requires a timely filed estate tax return at the first spouse’s death. Otherwise, the lifetime amount of the first spouse to die may still be lost. Even for estates with little or no assets, this could be extremely costly later, especially if the surviving spouse “wins the lottery” or otherwise comes into increased wealth. Thus, even families with very modest estates should consult an attorney.

Prior to the portability feature, the lifetime amount of the first spouse to die was often lost if proper planning was not done. If the spouse with no assets died first, all of the couple’s wealth was left in the survivor’s estate, with only one lifetime amount left to shield assets from tax. Whether the portability feature would be available after 2012 had been an open question. Congress has answered that question in the affirmative, by keeping portability for 2013 and beyond.

State Death Taxes and Other Considerations in 2013 and Beyond

Another significant change in the American Taxpayer Relief Act involves how state death taxes are treated for federal estate tax purposes. Years ago, many state death taxes were tied to the federal credit that existed for state death taxes. These state death taxes were similar to each other in that they would “pick up” the federal credit amount.

During the sunset era, the federal credit was replaced with a federal deduction, and many states revised their laws to separate from the current federal tax calculation. The result? We now see a greater variance among the states as each state develops its own death tax features. The recent tax changes made the replacement of the federal credit with a deduction permanent.


Whether the federal credit would come back after 2012 had been an open question. The answer is that the credit has been permanently replaced with a deduction, so we may see a continued variance among death taxes from state to state. Check with your advisor about how your plan fares under any state death tax as well as federal transfer taxes.

The recent tax reform also answered some open questions about the future of various estate tax features that had been subject to uncertainty. Taxpayer-friendly GST provisions are now permanent, which helps in planning for gifts and other transfers to grandchildren and younger generations. Provisions friendly to small business have also been made permanent, including a broader availability of the option to pay estate tax in installments. Other permanent provisions include those affecting a prior deduction for family-owned businesses and qualified conservation easements.


During 2001 through 2012, when the automatic sunset had been looming, the lifetime amounts and top rates were set to automatically change from year to year, unless Congress took further action. Now, the lifetime amounts and top rates should stay at the same level from year to year, unless Congress takes further action.

Keep in mind that Congress is in the business of making, and changing, laws. It can change the law at any time, and often does. It would take additional action at this point to change the rates or the lifetime amount again, but we now have at least some degree of certainty going forward.

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