Estate and Gift Tax Under The 2012 Tax Relief Act

New Permanent Indexed Estate & Gift Tax Exemption. The 2012 Tax Relief Act permanently establishes the estate exemption amount (technically, the basic exclusion amount) at $5 million per person (as increased for inflation after 2011). Inflation indexing increased the exemption to $5,120,000 for 2012.  Based on inflation data, the exemption should approximately $5,250,000 for gifts made and decedents dying in 2013. The exemption is allowed in the form of a unified credit. (Code Sec. 2010)

Maximum Transfer Rates Raised from 2012 Levels. The maximum estate and gift tax rate was 35% for gifts made and decedents dying in 2012.  The 2012 Taxpayer Relief Act changes the top rate to 40% for gifts made and decedents dying after 2012.  Under the Act, transfers over $500,000 are taxed at 37%, transfers over $750,000 are taxed at 39% and transfers over $1,000,000 are taxed at 40%. More specifically, the tax on a transfer over $1 million is $345,800 plus 40% of the excess over $1,000,000. (Code Sec. 2001(c), Code Sec. 2502(a), and Code Sec. 2641, as amended by Act Sec. 101) Thus, the $5,250,000 exemption for 2013 would offset $2,045,800 in tax ($345,800 + (.40 × $4,250,000)).

Generation-Skipping Transfer Taxes (GST).  The 2010 Tax Relief Act made the GST tax exemption for decedents dying or gifts made after Dec. 31, 2010 and before Jan. 1, 2013 equal to the basic exclusion amount for estate tax purposes (e.g., $5 million, as indexed), set the GST tax rate for transfers made in 2011 and 2012 at 35%.  The 2012 Taxpayer Relief Act makes these changes permanent, except that it increases the GST tax rate to 40%.  In other words, under the 2012 Taxpayer Relief Act, for decedents dying and gifts made after 2012, (1) the GST tax exemption is equal to the basic exclusion amount of $5 million as indexed, which should be approximately  $5,250,000 for 2013; (2) the GST tax rate is 40%; and (3) the technical modifications to the GST rules made by prior law continue to apply.

Portability of Unused Exemption Between Spouses Made Permanent.  The 2010 Tax Relief Act authorized estates of decedents dying after 2010 and before 2013 to elect to transfer any unused exclusion to the surviving spouse.  The amount received by the surviving spouse is called the deceased spousal unused exclusion, or "DSUE", amount.  If the executor of the decedent's estate elects transfer, or portability, of the DSUE amount, the surviving spouse can apply the DSUE amount received from the estate of his or her last deceased spouse against any tax liability arising from subsequent lifetime gifts and transfers at death.  The 2012 Taxpayer Relief Act has made this provision permanent. (Code Sec. 2010(c)(2)(B), Code Sec. 2010(c)(2)(4), and Code Sec. 2010(c)(5), as amended by Act Sec. 101)

Other Changes Now Permanent.   The 2012 Taxpayer Relief Act also provides that several  temporary changes made under prior law are now permanent:  (1) replacement of the State death tax credit with a deduction, (2) repeal of the qualified family-owned business deduction, (3) modifications to the rules regarding qualified conservation easements, (4) installment payment of estate taxes, and (5) various technical aspects of the GST tax.