Estate Tax Law Changes

On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (the “2012 Tax Act”). The 2012 Tax Act removed the threat of automatic, adverse changes to the Federal Estate and Gift Tax.

As a result of the 2012 Tax Act, the law now:

  • Provides a $5.25 million estate tax exemption for decedents dying in 2013 and later. For married couples this means up to $10.5 million estate may escape federal estate tax entirely. The amount of the exemption will be adjusted upward for changes in inflation each year.
  • Provides the same $5.25 million gift tax exemption with the same inflation adjustment for gifts in 2013 and later.
  • Continues the concept of “portability” of a deceased spouse’s estate tax exemption. Portability allows a surviving spouse to use all of the deceased spouse’s unused estate tax exemption, even if the deceased spouse had done no tax planning.
  • Sets a flat 40% tax rate on the taxable portion of estates and gifts. (In 2009 the rate was 45%, and in 2011 and 2012 the rate was 35%.)
  • Allows the same inflation adjusted $5.25 million exemption from the generation-skipping transfer tax in 2013 and later.
  • Retains the gift tax annual exclusion, which for 2013, after an inflation adjustment, allows present interest gifts of up to $14,000 to as many recipients as the donor wishes.

The 2012 Tax Act brings welcome certainty to estate planning. A major change is the removal of the sunset provision that forced Congress to act, or have an automatic return of federal estate and gift tax to the law as it existed in 2001, when the federal estate and gift tax exemption was $1 million, and rates ranged up to 55%.  The current law has no expiration date.

Although the higher estate tax exemptions greatly benefit many Oregonians, the Oregon estate tax exemption remains at $1 million. It is important to keep this in mind, to prevent unexpected taxes that might be avoided with proper planning.  Oregon does not tax gifts.

Since Oregon does not tax gifts, Oregonians who expect to have estates above the Oregon estate tax exemption can reduce their Oregon estate taxes by making gifts during life to those who will eventually receive their estates.  Of course, clients should not make gifts that will put their own financial security at risk.  Because gifts do not increase the recipient’s income tax basis, the impact of capital gains taxes should be considered, especially if the recipient is expected to sell the gifted assets.

Making portability permanent may simplify estate planning for married couples. Owners of large IRAs and retirement plan accounts who otherwise were stymied by the difficulty in preserving those accounts, while maximizing the use of the federal estate tax exempt amount at the death of the first spouse, will enjoy greater flexibility.

If you have questions, please contact any member of The Estate and Business Planning Practice Group:

Arthur J. Clark
Nicholas M. Frost

This article provides general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, you are urged to consult with counsel concerning your own situation.