TBA Law Blog

Posted by: Christy Gibson on Jan 14, 2013

By: Donald J. Farinato
At long last, Congress has given us some certainty with respect to the federal wealth transfer taxes, that is, the estate tax, the gift tax, and the generation-skipping transfer (“GST”) tax.  The American Taxpayer Relief Act of 2012 (“ATRA”) provides permanence to the federal wealth transfer tax system for the first time in more than a decade.  ATRA passed the Senate and the House, and then President Obama signed it on January 2, 2013.  ATRA is generally favorable to most taxpayers, especially in light of some of the alternatives proposed during the year-long wealth transfer tax debate in 2012.
The estate tax exemption remains at $5,000,000, indexed for inflation after 2011.  Subject to confirmation from the Internal Revenue Service, the estate tax exemption for 2013 will be $5,250,000.  The maximum estate tax rate is now 40%.  This is an increase from the 35% rate of last year, but certainly much better than the maximum 55% rate that would have been in effect had ATRA not passed.
ATRA continues the unified exemption of gift and estate taxes, meaning that the gift tax exemption amount and rate are the same as for the estate tax.  Accordingly, a taxpayer may generally give away $5,250,000 in 2013 free of any gift tax.  Additionally, the gift tax annual exclusion has increased to $14,000 for 2013.
The GST tax, which applies to a transfer of assets two or more generations below the transferor, has the same exemption amount and tax rate as the estate tax and the gift tax (that is, $5,250,000 and 40%).
A particularly valuable feature is that ATRA makes “portability” permanent.  Portability allows a surviving spouse to utilize the predeceased spouse’s unused exemption amount, ensuring that a married couple can fully utilize both spouses’ exemptions.  However, the GST exemption is not portable.  Moreover, the surviving spouse must make a proper and timely election to obtain portability.
Another bit of good news in ATRA is that several proposed restrictions on estate planning techniques (for example, minimum terms for Grantor Retained Annuity Trusts and reducing the availability of valuation discounts) were not included.  Additionally, ATRA makes permanent a number of taxpayer-friendly technical provisions enacted under prior legislation (for example, rules governing the GST exemption and the implementation of conservation easements).
While ATRA represents a significant development with respect to federal wealth transfer taxes, the Tennessee inheritance tax and gift tax remain the same.  The Tennessee gift tax was repealed effective January 1, 2012.  The Tennessee inheritance tax is scheduled for complete repeal in 2016.  In the interim years, the Tennessee inheritance tax exemption amount will increase based on the following schedule:
-         2013:  $1,250,000
-         2014:  $2,000,000
-         2015:  $5,000,000
-         2016:  Tennessee Inheritance Tax Repealed
Portability is not available for Tennessee inheritance tax purposes.  Accordingly, there may still be a need for individuals with taxable estates in Tennessee to maintain their tax planning until they determine that the Tennessee inheritance tax no longer affects them.