“Permanent” Estate Tax Rules for a Change

By Barbara Jo Smith
(Spring 2013)

Ever since 2001, estate planning professionals and their clients have been operating under rules that had a cliff at some future date.After each cliff was a major change in the federal estate tax law. Clients have been left between a cliff and a Congress as each deadline approached with no clear indication of what action lawmakers would take. Here is a review:

Cliff 1: December 31, 2009, after which there was full repeal of the estate tax, but carryover basis for income tax purposes.No action was taken by Congress until December 17, 2010, and they allowed taxpayers to choose the new law or old law.The new law was a $5 million inflation-adjusted exemption and a 35% tax rate.

Cliff 2: December 31, 2010, after which the exemption amount would return to $1 million with a maximum rate of 55%. As noted above, Congress acted right as they left Washington for their Christmas holiday, but the change was only for two years.

Cliff 3: December 31, 2012, after which the exemption amount would return to $1 million with a maximum rate of 55%.Congress left on its holiday with no action, but with promises to return.They actually did not act until after the New Year, so clients were left having to act or not based on no information.Congress, retroactively for those dying on January 1, 2013, kept the $5 million inflation-adjusted exemption, but with a 40% estate and gift tax rate for amounts in excess of the exemption.

The good news is that, after the roller coaster ride of the last several years, there is no automatic cliff in the distance for estate and gift taxes.The $5 million inflation-adjusted exemption and the 40% tax rate for amounts in excess of the exemption have no expiration date. To categorize the current structure as “permanent” is, of course, not quite right either as Congress and the President can pass new laws any time.The hope is that if Congress decides to change the estate and gift tax exemption, tax rate or other rules of the system, the effective date would be in the future so planners and clients could appropriately adjust plans.

Going forward, the federal exemption (inflation-adjusted for 2013) is $5,250,000 for estate, gift and generation skipping transfer tax.The tax rate for amounts over the $5,250,000 is 40%.The annual exclusion is $14,000 (up from $13,000 last year).

In contract to federal law the last several years, Oregon law has been constant with its $1 million estate tax exemption.The rate structure that took effect in 2012 starts at 10% and climbs to 16% for taxable estates over $9.5 million.Therefore, even if articles in national publications indicate that no special planning is required for estates of less than $5 million, special planning is still required for those living in Oregon or having Oregon property with assets in excess of $1 million in value.