Permanent Tax Law. Are you serious?

Obviously, President Obama still needs to sign the fiscal cliff bill that passed the Senate and House, but assuming he does so, our country’s tax law just became much more predictable. Sometimes, even legislators surprise me. As everyone knows, congress passed legislation to permanently extend the majority of provisions originally enacted under the Bush Administration by virtue of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Amazingly, these are “permanent” extensions. In 2010, congress extended the tax provisions for two years by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Now, congress has nearly done the unthinkable. We now have fixed tax law. We can plan. We can forecast. We can sleep.

As the fiscal cliff drew closer, estate planning attorneys from around the country were scurrying with their clients to move money out of clients’ estates. The fear of being subject to a $1 million estate tax exemption was unthinkable to many, especially older clients with assets between $1 million and $5 million. I tend to believe that more money was transferred from one generation to the next in 2012 than in any other year in history. In fact, if we could see numbers, I suspect the month of December may have surpassed any other single month in history.

Fortunately, the new legislation provides us with permanent gift tax, estate tax, and generation-skipping transfer tax law. This is a tremendous relief from a planning perspective. The new law repeals the sunset provisions of Title IX of EGTRRA and section 304 of the Job Creation Act of 2010. The federal estate tax applicable exclusion amount and generation-skipping transfer tax exemption will remain $5.12 million per person in 2013. In addition, the current index for inflation will remain in place moving forward. Due to the inflationary index, the exemption will grow each year. It is possible that the 2013 amount of $5.12 may be increased slightly, but I have not seen any figures yet. The only change relates to the actual estate tax rate. In 2012, if a decedent’s estate exceeded $5.12 million, his or her estate was subject to tax at 35% on all amounts above $5.12 million. Beginning in 2013, the tax rate will be 40%. This is the result of a compromise between Republicans and Democrats. The Republicans retained the higher exemption amounts, but the Democrats gained a higher tax rate.

The lifetime gift tax exemption of $5.12 million will remain in place subject to the same inflationary index. This is also pleasant news, because the estate tax, gift tax, and generation-skipping transfer tax exemptions will remain unified. This unification creates simpler planning. For 2013, the federal gift tax annual exclusion has been increased to $14,000 per donee. Last year, the exclusion amount was $13,000, but the inflationary index made the amount increase to $14,000 for 2013.