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Estate and Gift Tax Changes in the “Fiscal Cliff” Tax Act

Dear Mr. Premack: We all know that Congress finally passed a new tax law, even though they haven’t addressed other important issues. I’ve read a lot about the law’s income tax effects but not much about the estate and gift tax effects. Since you are an expert on estate planning, can you tell me what the new law does to estate and gift taxes? – G.V.

This turmoil in the tax laws began when the “Bush tax cuts” were first enacted through the Economic Growth and Tax Relief Reconciliation Act of 2001. A short provision in that Act, which went unnoticed by the general public for the first few weeks, was its automatic termination on December 31, 2010. Congress had determined that the tax cuts would have too big an effect on the federal deficit to make them permanent, so they were created as a temporary measure.

Once taxes are reduced, it is politically difficult to raise them. The Congress and President who granted the tax cuts had left office before the 2010 deadline. A new Congress and new President, facing difficult economic conditions, decided that the tax cuts should be extended. They voted in December 2010 to grant a two year continuation of all the tax breaks, and in the estate & gift tax area they even expanded the breaks to the highest levels ever granted by law.

Their mistake, of course, was to defer the tax debate into a politically divisive presidential election year. Add the fact that Congress passed another law mandating deep spending cuts for early 2013 unless they pass a more tailored deficit reduction plan. Add the additional fact that the government’s authority to borrow will hit its limit in early 2013. This combination of automatic tax increases, automatic spending cuts and lack of borrowing authority is what the commentators labeled the “fiscal cliff”.

Congress has, to date, failed to find a solution to all of those issues. The law they passed (the American Taxpayer Relief Act of 2012) focuses mainly on the tax issues. The Act does give Congress a 60 day extension on the automatic spending cuts, but does not address the borrowing issue.

The Act does make many of the Bush tax cuts permanent. Most of the tax changes no longer face automatic expiration in the future. Regarding estate and gift taxes, the new law has these features:

  1. There is a permanent $5 million per person exemption from estate and gift taxes. For the first time in over a decade, the law gives you the chance to make an estate plan that has predictable tax effects. You can count on this exemption staying in place for the foreseeable future. If you’ve delayed making an estate plan due to the past uncertainty, now is the time to contact your Elder Law attorney to move forward with your estate planning.

  2. The $5 million exemption is portable and will expand with inflation (it has already grown to $5,250,000). A married couple can avoid tax on up to $10,500,000 if they take the correct actions. Once an estate exceeds the applicable exemption amount, tax will be due at 40% (a reduction from the 50% which would have been imposed if this new law had not passed, but an increase from the 35% rate in 2012).

  3. The annual gift tax exclusion increased from $13,000 to $14,000. A married couple can now make outright gifts of up to $28,000 per year per recipient without any gift tax or income tax consequences.

  4. You are once again allowed to make a charitable gift from your IRA account without paying income tax on the withdrawal. You can still make a charitable IRA gift for your 2012 tax return if you do it before February 1, 2013. IRA withdrawals from December 2012 can still be given to charity until January 31, 2013 yet receive the same income-tax-free treatment.

Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2012) practicing estate planning and probate law in San Antonio.

Original Publication: San Antonio Express News, January 4, 2013


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