Will there be an Estate Tax Fix in 2013?

It’s been about ten days since the Presidential election and with everyone relaxing a little, now is a good time to talk about what the election results mean for the estate tax and estate planning.  If you are not aware, on January 1, 2013, the estate tax reverts back to a $1 million exemption level, the lifetime gift tax exemption is lowered to $1.0 million and the generation skipping tax exemption level  will be approximately $1.0 million.

Late in 2010, I presented the various scenarios on where the estate tax would go. I’ll note, not one of the scenarios was 100% accurate.  The estate and gift tax realm in 2011 and 2012 had the following main tax provisions:

• $5.0 million per person federal estate tax exemption with a tax rate of thirty-five percent (35%) that was indexed with inflation.
• $5.0 million per person federal lifetime gift tax exemption with a tax rate of thirty-five percent (35%) that was indexed with inflation.
• $5.0 million per person generation skipping tax exemption with a tax rate of thirty-five percent (35%) that was indexed with inflation.
• Portability was introduced to allow a married couple to shift their individual federal estate tax exemptions between the two spouse to provide a $10 million exemption.

But, where will go from here?

President Obama’s 2013 budget proposal released earlier this year had the following positions:

• Reversion of the estate and gift tax rates and exemptions back to 2009 levels (i.e. federal estate tax and generation skipping tax exemptions would be lowered to $3.5 million and lifetime gift exemption would go back to $1.0).
• Portability would remain between spouses but at $7.0 million level. This is a change for President Obama’s 2011 Budget proposal.
• Basis reporting requirements for donated and inherited property to better track capital gains.
• Minimum 10 year term for Grantor Retained Annuity Trusts (GRATs).
• Elimination of the tax benefits associated with the sale to an Intentionally Defective Grantor Trust (IDGT).
• Duration of GST tax exemption limited to 90 years to limit future dynasty trust planning.

My best guess is that the above will be the opening position for the President in any estate tax discussions. In other words, this is the floor you can probably work from if you believe some form of compromise will occur. I am not so sure of that anymore. I’ve been telling most people you have to plan for how the 2013 estate tax law is currently written. To make matters worse, I have also seen a number of experts state the going over the fiscal cliff might be a good plan long-term because it would allow a fresh start for everyone.

The biggest proponents in the Senate for estate tax reform on the side of higher estate tax exemptions or elimination of the federal estate tax exemptions – Blanche Lincoln and Jon Kyl – are no longer or will no longer be Senators in 2013.  That means a level of uncertainty. It is not determined what Congressman or Senator will replace Senator Kyl as an advocate for higher exemption levels.  For those people wishing lower levels, Senators Bernie Sanders, Tom Harkin and Carl Levin  and Carl’s brother Representative Sander Levin are still in Congress.

Another big issue is that estate tax could get pulled into the broader discussions reforming the entire tax code – personal, corporate, etc.  That means anything can go and any number of outcomes could result. And, without the strongest advocate for a higher level of estate tax exemptions that means the chances of a lower level are certainly greater.

Needless to say, the political arm twisting in D.C. over the next few months will be interesting and could provide unsuspected outcomes.

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