Estate Tax Law Certainty: Congress Makes Estate Tax Exemption Permanent at $5 Million

For the first time since 2001, Congress has provided some degree of certainty about the federal estate and gift tax.

A new estate and gift tax law was signed by President Obama on January 2, 2013. Part of the more sweeping American Taxpayer Relief Act of 2012 (ATRA 2012), the law was negotiated to avoid the “fiscal cliff” created by the expiring 2001 law and automatic spending cuts.

When the 2001 law was originally passed, the estate tax exemption was immediately raised to $1 million and periodically increased over the last decade to $3.5 million in 2009. But the law was scheduled to expire in 2011. The exemption was raised to $5 million in 2010, and the law was extended by two years until December 31, 2012. The expiration provision threatened to roll back the exemption to $1 million this year, if Congress was unable to pass a new law.

Under ATRA 2012, the estate and gift tax exemption was made permanent at $5 million, subject to inflation indexing. With indexing, Americans can actually pass up to $5.25 million to their heirs in 2013 without incurring any gift or estate taxes. The tax rate for gift or estate transfers above $5.25 million was raised from 35% to 40%. This means that an individual who is passing $6.25 million to heirs this year would incur a tax of $400,000.

Married couples can each pass $5.25 million of wealth, meaning that, with proper planning, a family can actually transfer $10.5 million to their heirs.

Call us or attend one of our regular estate planning workshops if you have questions about how the new law affects your personal estate planning.