Fiscal Cliff Deal Extends $5 Million Estate and Gift Tax Credit and Generation-Skipping Transfer Tax Exemption, but Increases Tax Rate to 40%

The bill passed by Congress on January 1, 2013, to avoid the “fiscal cliff,” which is expected to be signed into law by President Obama shortly, permanently extends the favorable gift, estate and generation-skipping transfer tax provisions that were in effect during 2011 and 2012, but increases the tax rate from 35% to 40%. The modified law provides for the following:

The Credit Amount: Each individual has a $5 Million credit against gift and estate tax, indexed for inflation relative to 2010. In 2013, the credit amount is expected to be $5,250,000.
Unified Credit: The $5 Million credit may be used either to shelter lifetime gifts from the gift tax or to shelter assets passing at death from estate tax. The amount used during lifetime will directly reduce the amount available to shelter assets passing at death.
Sharing Between Spouses: If one spouse does not fully use his or her credit to shelter gifts during lifetime and to shelter assets passing at death, the surviving spouse can use the deceased spouse’s unused credit amount, in addition to the surviving spouse’s own credit, provided an election is made at the deceased spouse’s death.
Tax Rate: Transfers in excess of the $5 Million credit are subject to tax at a rate of 40%.
Generation-Skipping Transfers: Transfers to individuals two or more generations below the transferor (for example, from grandparent to grandchild) are subject to an additional tax of 40%, after application of the gift or estate tax. Each individual may shelter up to $5 Million, indexed for inflation relative to 2010, of assets from the generation-skipping transfer tax.

In addition to the change to the transfer tax rate that is part of the fiscal cliff deal, please note the following additional changes that went into effect on January 1, 2013:

Annual Exclusion Amount: The annual exclusion from gift tax – the amount that can be transferred to an unlimited number of individuals in a calendar year without imposition of gift tax – increased to $14,000 in 2013.
3.8% Medicare Tax: The new 3.8% Medicare tax on net investment income applies to the net investment income of trusts and estates, as well as to that of individuals.

After twelve years of uncertainty, it appears there is some finality on the credit amounts and tax rates for gift, estate and generation-skipping transfers. However, proposals to eliminate certain favorable estate planning techniques, such as discounts for interests in family business entities, irrevocable grantor trusts and short-term zeroed out grantor retained annuity trusts, remain unaddressed and are likely to be reintroduced as a part of the President’s 2014 Budget Proposal.

Please contact Laura Zwicker, or any member of Greenberg Glusker's Family/Strategic Wealth Planning Group, if you wish to discuss taking advantages of these estate planning techniques before their possible elimination or if you have any questions about the new tax law.