The Fiscal Compromise and Estate Planning


It is a few days since the world was allegedly going to end – either on the Mayan Calendar or the Fiscal Cliff Calendar – and we survived. We also got an answer to the question of whether there would be an estate tax fix for 2013? The answer is “yes.” But, what was that answer.

Here is the impact of the American Taxpayer Relief Act of 2012 (ATRA) compromise as it relates to estate planning:

  • Extended the inflation-adjusted individual $5 million gift, estate and generation-skipping transfer (GST) tax exemptions that were put in place in 2010. For 2013, inflation adjusted exemption amount for the three taxes will be $5.25 million.
  • Raised tax rate on estates with assets above the gift, estate and generation-skipping transfer (GST) tax exemptions levels to a top rate of 40%.  This is an increase from 35% in 2011 and 2012.
  • Made permanent portability for married couples.  As long as a federal estate tax return is filed in the death of the first spouse, portability allows the surviving spouse to use the unused federal estate tax exemption of the first spouse to die. If both spouses die in 2013, that would result in the ability to shield $10.5 million in combined assets from federal estate taxes.
  • Retained the ability to deduct state estate taxes on the federal estate tax returns. A gift to those states that apply a state estate tax and complain it makes their states less attractive to older residents.
  • Retained,  for the time being, the current tax and legal status of grantor retained annuity trusts, valuation discounts, unlimited-term generation-skipping trusts and other high-level estate planning techniques. All of these techniques have targets on their back and could be reduced or eliminated in the upcoming negotiations.

In addition to ATRA raising the income tax rates on affluent Americans – those making more than $400,000 (single) and $450,000 (married) – ATRA impacted other areas of the income tax that cross-over with estate planning. Those changes include:

  • Reinstated the tax-free distribution from an individual retirement plan directly to a qualified charity. The ability to make this charitable transfer technically expired at the end of 2011.  But, ATRA included a special provision permitting individuals to make a  payment directly to a charity in January 2013 and still be treated as a tax-free 2012 distribution from the IRA.
  • Eliminated the need for the Alternative Minimum Tax “patch” that occurred every year by adding an inflation index to the AMT exemption levels.
  • Reintroduced back into the tax code limits on itemized deductions (PEASE) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). In the past, PEASE applied across the board on all of a person’s itemized deductions including donations to qualified charities. With PEASE reintroduced, it will likely mean a reduction in clients creating Charitable Lead Trusts and other similar entities because of the reduced tax savings that occurs because of PEASE.  I think I will get into this more in a future post.
  • Reintroduced back into the tax code phases out personal exemptions (PEP) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).  PEP and PEASE are rather nasty tax provisions because it slashes a persons deductions and silently increases a person’s effective tax rate e.g. a married couple having an AGI of $350,00 would be in the 35% tax bracket but have a higher effective tax rate.

However, there are still three more big  fiscal issues (debt ceiling increase, remaining 2013 budget reconciliation and sequestration) confront the federal government over the next 60-90 days.  Anything can happen and the above estate and tax provisions could all change by the first day of spring.

I also apologize for the long silence, the fiscal cliff created a great deal of work in December. I worked at least some on everyday of the month, including Christmas, aiding clients to prepare for the end of the year tax changes and that left no time to add to my blog. My New Year’s resolution is to do better.


About Chris Guest

I am a trust and estate planning attorney working in the Washington, DC metro area. I offer comprehensive estate planning, trust administration, probate services and general business counseling for accountants, attorneys, business owners, consultants, federal and local government employees, retirees, other business professionals and other individuals.
This entry was posted in Assets, Estate Planning, Federal Estate Tax, Income Tax, Portability. Bookmark the permalink.

One Response to The Fiscal Compromise and Estate Planning

  1. Pingback: Federal Estate and Gift Tax Rules for 2013, Including Examples

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