Major Changes to Gift/Estate Taxes Looming By Year’s EndOctober 30, 2012
By Mary E. Hoyt, CPA
There could be significant changes coming by the end of 2012 to laws regulating taxes on gifts and estates, so if you have not already planned for these changes, now is the time to prepare for the possible impact.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), also known as the first of the two “Bush Tax Cuts”, laid out substantial changes to gift and estate taxes. The 2010 Tax Relief Act gave us a two-year temporary relief from the sunset provisions of EGTRRA as well as additional gift and estate tax changes.
With the end of 2012 now less than two months away, many of the relief provision changes will be coming to an end this year unless there are legislative changes. This means time is running out for people to take action in their estate planning or gifting strategies if they want to take advantage of the opportunities available under current law.
The 2012 Sunset – Under the EGTRRA, the top gift tax rate for 2010 was 35% with a $1 million applicable exclusion amount. After 2010, the pre-EGTRRA rules were scheduled to be revived, which would have had a significant impact on people’s plans to create gifts.
The 2010 Tax Relief Act provided that, for gifts made in 2011 and 2012, the gift tax is reunified with the estate tax, with a tax rate through 2012 of 35% and an applicable exclusion amount of $5 million. (Indexed for inflation, the 2012 rate is $5.12 million.)
As a result, with the end of 2012 now looming, many estate planners are recommending utilizing the full lifetime $5.12 million unified estate and gift tax exclusion before it sunsets on December 31, 2012. While there is concern that any exclusion amount in excess of a future exclusion may be “clawed back” into an eventually taxable estate, the belief is that even with the worst case situation, any appreciation on the gifted property will escape the estate tax at that later date. (NOTE: Here in Connecticut, the maximum exemption for taxable gifts is $2 million.)
GST Tax – Also under EGTRRA, the generation-skipping transfer (GST) tax was scheduled to be repealed for 2010 and would return GST rules to pre-2001 standards in 2011. The 2010 Tax Relief Act modified this timeframe to increase the exemption from $1 million to $5 million ($5.12 million in 2012) through 2012 at a maximum rate of 35%. The pre-EGTRRA GST rules are now scheduled to return after this year.
If the GST provisions in the 2010 Tax Relief Act are not extended, there will be a 20 percentage point difference between the 35% rate applicable to transfers in 2012 and the 55% rate that would apply for transfers after 2012. Once more, planning for this now could allow people to avoid negative tax results later.
Estate Tax Rates – After 2012, the maximum federal estate tax rate is scheduled to return to 55%, with an applicable exclusion amount of $1 million. There could be a legislative change in this area since there are numerous proposals floating around. For example, President Obama has proposed to extend the federal estate tax after 2012 with a top tax rate of 45% and an applicable exclusion amount of $3.5 million.
Portability – The 2010 Tax Relief Act introduced the concept of “portability” into the federal estate tax regime. This allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion (the deceased spousal unused exclusion amount (DSUE) to the surviving spouse’s own transfers during life and at death. However, portability is only available to the estates of decedents dying before January 1, 2013, barring any changes being made.
State Death Tax Credit/Deduction – Before 2005, a credit was allowed against the federal estate tax for state estate, inheritance, legacy or succession taxes. EGTRRA repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction. The state death tax credit as it existed pre-EGTRRA, initially scheduled to be revived after 2010, was extended by the 2010 Tax Relief Act through 2012.
Mary E. Hoyt, CPA, is a partner with BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut and Massachusetts. The firm, with nearly 300 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation, and financial staffing. The firm, with offices in West Hartford, Westport and Shelton, CT and Boston and Rockland, MA, serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.