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American Taxpayer Relief Act of 2012 (ATRA) – “Permanent” Estate Tax Changes For 2013

As part of the later than last minute deal between Congress and the President to postpone the fiscal cliff, the federal estate tax laws received some added stability and permanence. For the first time in a decade, it appears that the estate tax will remain relatively predicatable from one year to the next, at least for the foreseeable future. Ever since the implementation of the Bush era tax cuts, the federal estate tax has changed almost annually. Over that time, the exemption amount grew from $1 million to $3.5 million in 2009 until it phased out completely in 2010. Of course, due to retroactive changes to the 2010 tax laws, most estates of decedents dying in 2010 chose to use the optional $3.5 million exemption and take advantage of the stepped-up basis.

The drama continued in 2011 and 2012 with the introduction of portability, the unification of the gift and estate tax exemptions, and the increased inflation-adjusted exemption limit of $5,000,000. Every bit of it was temporary and set to expire at the end of 2012. Planners rushed to take advantage of these potentially one-time gift and estate tax exemption levels before they disappeared forever.

Enter the so-called fiscal cliff deal known as the American Taxpayer Relief Act of 2012 (ATRA). The changes are mostly good news, although the tax rate for those few estates paying tax increased from 35% to 40%.

The portability provision, which allows married couples to use both spouses’ exemption amount without using a bypass trust or other estate planning device, became a permanent fixture. While there are still plenty of reasons to use a bypass or credit shelter trust if you have a taxable estate, portability has the ability to simplify matters for many taxpayers.

The bigger surprise is that the estate tax exemption amount, also now permanent, will remain at $5,000,000 per person, and will continue to be adjusted for inflation. Combine this with the permanent unification of the gift and estate tax exemption amounts and you get an estate tax planning landscape in which there is much more flexibility to incorporate lifetime gifts into the esatate planning strategy. Look for creative attorneys to start coming up with even more ways to help you reduce or eliminate your estate tax bill.

And the greatest surprise of all may be that all of these changes are “permanent”. Of course, permanent in this case only means that they are not set to change automatically as time goes on. Congress can always change them whenever they choose. Even so, it has been a long time since we have had any sense of permanence to the estate tax laws. It should be interesting to see what the world is like without the constant guessing games that kept estate tax planners so busy over the last decade.

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