The Estate Tax Exclusion Amount: It is “Permanent” only as long as they say it is!

The Estate Tax Exclusion Amount: It is “Permanent” only as long as they say it is!

We were told at the end of December last year that there is a “permanent” fix to the estate tax issue. Of course, for federal tax law purposes, something is “permanent” only so long as Congress and the President say it is. I am talking about the “basic exclusion amount” for federal gift and estate tax purposes. This is the amount that a taxpayer can give away either during life or at death [or both] before any federal gift or estate tax (“transfer tax”) will have to be paid on the transfer. The American Taxpayer Relief Act of 2012 (the “2012 Act”), signed into law by the President on January 2, 2013, made “permanent” the $5 million inflation-adjusted basic exclusion amount, currently $5.25M. The 2012 Actalso made “permanent” a top marginal transfer tax rate of 40%.

But what is this?? Less than 100 days after the President signed the 2012 Act into law, his Administration released the“General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals” (http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf). It appears that the Administration already wants something less “permanent” with respect to the basic exclusion amount and the highest marginal transfer tax rate.

The Administration proposes returning to the federal transfer tax law in effect for 2009 for estates of decedents dying, and gifts made after, December 31, 2017. Thus, in just under five years, beginning in 2018, the highest marginal transfer tax rate would increase to 45%, the lifetime gift tax exclusion amount (i.e., the amount a taxpayer can give away during life) would fall to $1 million, and the estate tax exclusion amount (and generation-skipping transfer (“GST”) tax exemption amount) would revert to $3.5 million, with no indexing for inflation. The Administration’s proposal states that portability would continue and asserts that “no estate or gift tax would be incurred by reason of decreases in the applicable exclusion amount with respect to a prior gift that was excluded from tax at the time of the transfer” (so there will be no so-called “claw back” for lifetime transfers made in excess of $1 million). The “permanence” of the current exclusion amount and tax rates may depend heavily on the outcomes of the 2014 mid-term Congressional elections.

Beginning in 2018, the proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5million for estate and GST taxes, and $1 million for gift taxes. There would be no indexing for inflation.

The proposal would confirm that, in computing gift and estate tax liabilities, no estate or gift tax would be incurred by reason of decreases in the applicable exclusion amount with respect to a prior gift that was excluded from tax at the time of the transfer. Finally, portability of unused estate and gift tax exclusions between spouses would be allowed.The proposal would be effective for the estates of decedents dying, and for transfers made, after December 31, 2017.

Stay tuned for more!

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