The American Taxpayer Relief Act of 2012 (ATRA) was passed on January 1, 2013, and was signed into law on January 2, 2013. The changes are often referred to as “permanent” because there are no sunset provisions. However, the Obama Administration has already proposed changes.
There is again a unified credit for estate tax and gift tax—now inflation-adjusted, however—permanently set at $5,000,000, using the Applicable Exclusion Amount (AEA) effective in 2010, the base year. Adjusted for inflation, AEA for decedents dying in 2013 is $5,250,000, and the amount for 2014 was recently set at $5,340,000. [Although the estate tax is often said to have been “repealed” for 2010, late in 2010 legislation gave estates the option of choosing between a $5,000,000 AEA, or having unlimited AEA while subject to modified carryover basis rules for reporting of capital gain. The AEA remained at $5,000,000 for 2011, and increased to $5,120,000 for 2012.] ATRA increased the transfer tax rate from 35% to 40%.
Under ATRA, the Generation Skipping Transfer (GST) tax rate also increases from 35% to 40%, and the change in GST exemption is essentially identical to the change in AEA—now $5,250,000 for 2013, inflation adjusted using 2010 as a base year at $5,000,000.
However, one very big difference is that GST exemption is not “portable.” Portability is a new concept, introduced temporarily in 2010 and now made permanent under ATRA, which allows a surviving spouse to use the deceased spouse’s unused AEA. This amount is called the Deceased Spouse Unused Exclusion Amount (DSUEA). The survivor’s AEA is now the sum of (1) Basic Exclusion Amount (BEA), and (2) DSUEA. The survivor’s BEA is simply the AEA generally in effect in the year of the survivor’s death.
In the above calculation, the survivor may use only the DSUEA of the last deceased spouse. That DSUEA is defined as the lesser of (1) the BEA in effect in the year of deceased spouse’s death; or (2) the excess of deceased spouse’s AEA over the amount on which the tentative tax on deceased spouse’s estate is determined (i.e., deceased spouse’s adjusted taxable gifts and taxable estate).
While survivor’s BEA is inflation-adjusted, DSUEA is not. On the other hand, the survivor can remarry multiple times and gain the benefit of multiple DSUEA, one from each deceased spouse. Split gifting may be used by the survivor to take advantage of DSUEA, even after remarriage, before the next spouse dies. This may be necessary for example, where DSUEA from the later deceased spouse will be less than the prior DSUEA.
ATRA permanently treats state death taxes as a deduction, rather than as a credit.
Some of the changes proposed by the Obama administration: restoring the 2009 rates and amounts; requiring minimum term of ten years for GRAT; limiting the term of GST exempt trusts to 90 years; restricting GST exemption for Health and Education Exclusion Trusts (HEETs); maximum 5 year stretch for non-spouse beneficiaries of inherited IRAs; limiting the total funds that can accumulate in a tax-favored retirement account.