As you may already have learned, in the first two days of 2013, Congress passed a tax compromise that averts the “fiscal cliff” and makes permanent the federal estate tax with an exemption of $5.12 million per individual and a tax rate of 40% for amounts over the exemption. But this news bite might leave you hungry for details about the estate tax, such as portability of the exemption, and the other wealth transfer taxes–the gift tax and the generation-skipping transfer tax. This post aims to answer your questions and serve as a useful resource.
H.R. 8 – Background
The agreement that Congress reached is H.R.8, American Taxpayer Relief Act of 2012.
On July 24, 2012, Rep. Dave Camp [R-MI-4] introduced a different version of this bill. Although the House passed the earlier version of H.R. 8 on August 8, 2012 in a 256-171 vote (see Roll no. 545), “the Senate technically gutted and substituted in the language of the their tax act,” explains Kevin Staker, an estate planning attorney. “They had to do it this way because revenue acts technically have to start in the House.”
Senate Minority Leader Mitch McConnell [R-KY] and Vice President Joe Biden negotiated the current version of H.R. 8. The Senate passed H.R. 8 on January 1, 2013 in an 89-8 vote. See Record Vote Number: 251. The House passed H.R. 8 on January 2, 2013 by a vote of 257-167. President Obama signed H.R. 8 into law on January 2, 2013.
H.R. 8 – Wealth Transfer Taxes
The changes that H.R. 8 makes to wealth transfer taxes are succinct, but their impact is vast:
 Section 101(a) of H.R. 8 makes permanent the the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010).
 Section 101(c)(1) sets the estate tax rate at 40%, effective January 1, 2013.
Exemption? $5.12M, Indexed for Inflation
The estate tax exemption was scheduled to drop on January 1, 2013 from $5.12 million per individual to a mere $1 million per individual. Such a drop would have exposed even middle class families to the estate tax. The tax rate for amounts transferred over the exemption was scheduled to spike from 35% to 55% (60% in some cases).
H.R 8 does not change the estate tax exemption. So, it remains $5.12 million for individuals ($10.24 million for married couples). This exemption is higher than the $3.5 million exemption that Obama was calling for.
Is the Exemption Portable? Yes
The estate tax exemption will continue to be portable between spouses. This means that a surviving spouse can use the decedent spouse’s unused federal estate tax exemption without having to rely on trusts.
Ostensibly, a portable estate tax exemption reduces the need for bypass trusts. As Michael Kitces notes in Nerd’s Eye View, “Notably, the portability rules for a deceased spouse’s unused estate tax exemption amount are made permanent, which may significantly impact (i.e., reduce) the use of bypass trusts for all but the wealthiest of families.”
- in protecting assets from creditors,
- in cases where the surviving spouse might remarry,
- because assets might appreciate in value,
- because your plan might already include a bypass trust, and
- because bypass trusts avoid administrative pitfalls.
For more on portability, see How To Get The Latest Tax Break Without Spending A Bundle On Legal Fees, by Deborah L. Jacobs.
Is the Exemption Indexed for Inflation? Yes
The exemption will be indexed for inflation, and estate planners are already trying to predict what the exemption would be in 2013 after an inflation-adjustment increase. “I appear to be the only person predicting the exemptions will be $5,260,000, everyone else I can find is estimating it will be $5,250,000,” writes Kevin Staker, an estate planning attorney in California.
An inflation adjustment “means that those people who thought they used all of their gift tax exemption in 2012 actually have more gift exemption in 2013,” writes Bryan Howard, a Tennessee estate planning attorney. “It also means that the fire drill at the end of December was unnecessary.”
The agreement increased the estate tax rate for amounts transferred over the estate tax exemption to 40%. The 40% tax rate that Congress agreed to is a compromise between the 45% rate that President Obama was seeking and the 35% rate that was in effect for 2011 and 2012.
Exemption? $5.12 M, Indexed for Inflation
The lifetime gift tax exemption is $5.12 million per individual, and this exemption will be indexed for inflation.
Is the exemption unified with the estate tax? Yes
The gift tax is still unified with the estate tax. H.R. 8 does not change the 2012 rules. A unified estate and gift tax exemption means “the $5 million threshold applied to total transfers, whether by gift during lifetime or inheritance on death,” explains Smith Bovill, an estate planning attorney in Michigan.
More Estate Tax Changes Could Follow Fiscal Cliff Deal
January 6, 2013