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Tax Law Blog: Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation - January 2, 2013

The Fiscal Cliff legislation passed by the Senate on Monday and the House of Representatives late on New Year’s Day extends the estate, gift and generation skipping tax provisions we have been working with in 2011 and 2012.  A brief outline is as follows:

  • Estate and Gift Tax Exemption.  The estate tax exemption will continue at the $5,000,000 level, indexed annually for inflation.  In 2013, the exemption will be $5.25 million.  The gift tax exemption will continue to be integrated with the estate tax exemption.  An individual may give away $5.25 million during life or at death.  A married couple may give away a total of $10.5 million, either during life or at death.  This exemption amount is permanent.  There is no longer an automatic ‘sunset’ of the exemption amount.  
  • Generation Skipping Tax Exemption.  The generation skipping tax exemption is the same as the estate and gift tax exemption and is also indexed and permanent.   A couple can pass $10.5 million in a generation skipping trust or by direct gifts without causing inclusion in a child’s estate.  
  • The Tax Rates.  The estate, gift and generation skipping tax rates will be 40%, instead of the current 35%.  There is a ‘run up the brackets’ for the first $1 million of gifts that is a bit less favorable than was the case in 2012.  
  • Portability of Exemption.  The ability to transfer a deceased spouse’s unused exemption amount to a surviving spouse has been made permanent, with no change in the rules concerning portability.  A clarification of some language addressed in the portability regulations was accomplished.
  • Clawback.  Much has been argued about the potential for a ‘clawback’ if the exemption was reduced in 2013 with higher rates.  That issue is no longer relevant except as it was always present with respect to adjusted taxable gifts.  
  • Deductibility of State Death Taxes.  State death taxes are deductible under section 2058 of the Code.  
  • Step up in Basis.  The basis step up rules will continue to apply at death.  
  • Technical Amendments.  Some technical amendments which needed to be addressed for some time were included in the legislative package.  
  • Annual Exclusion Gifts.  In 2013 the annual exclusion amount will increase to $14,000.  
  • Extension of Tax-Free Distributions to Charities from IRA’s.  The ability to make tax-free distributions from an IRA to a charitable organization has been extended for another year.  In addition, any IRA distribution made to an individual in December 2012 or January 2013 may be contributed to charity (cash only) and treated as if the distribution was made directly to charity.