Estate Tax Made Permanent
The American Taxpayer Relief Act of 2012 (H.R. 8) was passed by the United States Congress on January 1, 2013, and was signed into law by President Obama the next day. Included in the Act were “permanent” estate tax provisions that stabilized tax rate and personal exemption amounts. Estate taxes were set at 40% of the value above $5.25 million, indexed for inflation, an increase from the 2012 rate of 35% of the value over $5.12. The Act retained portability, so a surviving spouse can still use a deceased spouse’s unused exemption, provided that an estate tax return is filed and the portability election is made.
The tax law passed by Congress in December 2017 kept the estate tax alive, but on more generous terms. Instead of taxing any amount above $5.49 million per person at a rate of 40 percent, the new law raises that exemption to $10 million, which, when indexed for inflation, allows individuals to pass on $12.92 million and couples to transfer twice that amount with no estate tax (for people who pass away in 2023. The exemption amount is $12.06 million for 2022.
But leaving the estate tax in place means America’s richest families now must revise older estate plans, and may need to do so again before the end of 2025. The new higher exemption is on the books for only eight years, and if Congress doesn’t change the law again, estates will once again face higher tax bills after 2026 after expiration of the new, temporary limits.
Significantly, the 2012 Act did not adopt proposals that had been floated during negotiations that would have curtailed planning opportunities to reduce or avoid estate taxes, including proposals requiring a minimum term for Grantor Retained Annuity Trusts (GRATs), substantially revising the so-called “grantor trust rules” (which permit a trust’s grantor to make additional tax-free gifts to the trust by paying the trust’s income tax), eliminating valuation discounts for transfers between related parties, and limiting the duration of a generation-skipping transfer tax exemption. The Act contained no such limitations. Accordingly, many sophisticated planning techniques remain unaffected by the Act, including short duration GRATs, sales to grantor trusts, loans to family members and trusts at the applicable federal rate (4.64 percent for mid-term loans made in November, 2023), and gifts of nonmarketable minority interests in entities.
While the 2012 Act’s provisions are stated to be “permanent,” this means only that the new provisions will not automatically sunset and revert to a less favorable law. Congress can still change the exemptions or tax rates in the future. Indeed, as noted above, the exemption amount was temporarily increased in 2017. It would not be surprising to see some of the restrictive proposals that were not adopted reappear in future tax reform legislation.