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Tax and Financial News for April 2013

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ATRA Simplifies Estate Taxes

The American Taxpayer Relief Act (ATRA), passed by Congress on Jan. 1, 2013, greatly simplifies the tax code’s estate and gift tax provisions and shows that Republicans and Democrats in Washington can actually compromise on certain issues.

The negotiations on the ATRA nearly came to a standstill in the Senate over the federal estate tax, which could have scuttled the entire agreement. Senate Republicans were pushing for a complete repeal of the estate tax, while President Obama and the Democrats wanted a maximum 45 percent rate and a $3.5 million exemption amount. In a rare compromise, the two sides eventually agreed on a maximum federal estate tax rate of 40 percent with a $5 million exclusion that is indexed for inflation. In addition, the legislation once again unifies the gift tax with the estate tax exclusion amounts and maximum rates.

Before the ATRA, a patchwork of rules required a complex application that depended on when the person had died. For decedents who died after Dec. 31, 2009 and before Jan. 1, 2013, the maximum estate tax rate was 35 percent with an exclusion amount of $5 million. However, the law also allowed the estates of people who died in 2010 to opt out and essentially pay no estate tax, although beneficiaries faced restricted carryover basis rules. In addition, for people who died after Jan. 1, 2013, the maximum rate would have reverted to 55 percent with an exemption amount of just $1 million that was not indexed for inflation, which were the rules prior to the adoption of estate tax reforms in 2001. This would have exposed far more Americans to estate taxes.

In another simplification, the ATRA permanently extended portability between spouses for the estate and gift tax extension. This provision allows an estate with a surviving spouse to add all deceased spouses’ unused exclusion amounts to his or her own during life and at death. Under the previous rules, portability was only available to the estates of people who died after Dec. 31, 2010 and before Jan. 1, 2013.

The ATRA also extends a number of other federal estate tax provisions. For instance, it extends the federal deduction that is allowed for state estate taxes. Before 2005, a credit was allowed, but it was phased out and replaced by the deduction in 2005, which continues with the ATRA. In addition, the legislation eliminates a 5 percent surtax on estates larger than $10 million and continues to allow installment payments of estate taxes for closely held businesses. Provisions affecting qualified conservation easements are also extended by the act, as well as several tax-related aspects of the generation-skipping transfer tax.

It is a rare and encouraging sign in these days of extreme partisanship that Republicans and Democrats were able to come together to simplify an extremely complicated tax code, compromise on tax rates and exemption amounts and, ultimately, avoid placing many taxpayers into an extremely onerous situation. However, even with the somewhat simpler rules, estate planning remains a complex and extremely important issue for individuals, and professional tax assistance can help ensure that your wishes are fulfilled. There are still many options to consider in developing a plan that serves your individual goals, and qualified tax professionals are available to help guide you through your decision-making process.

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