A little-publicized but welcome surprise occurred when Congress and the president reached agreement on how to limit some of the impact of the fiscal cliff and adopted the American Taxpayer Relief Act of 2012. The first section of the act is entitled “Permanent Extension and Modification of 2001 Tax Relief.” And at the end of this section, the estate tax provisions that were in effect in 2012 essentially are continued on a “permanent” basis. (Congress always can amend the law, but any near-term amendment is unlikely.)
For people trying to finalize a will, financial advisers, accountants and estate-planning attorneys, the past decade has been a challenge. By virtue of the plan adopted by Congress in 2001, some of the estate tax rules changed every year or two. Depending on the size of a prospective estate, trusts sometimes were needed as part of a will in order to minimize estate tax impacts. In 2011, the estate tax disappeared briefly only to be re-enacted and reconfigured on a temporary basis in the middle of the calendar year. And technically, the 2001 provisions expired for a few hours at the beginning of 2013, bringing the rules that existed before the 2001 legislation back into effect.
In the meantime, legal and financial advisers who were convinced that Congress never would get its act together before 2013 arrived (and the rules reverted to 2001 rules, with limited exemption amounts) suggested that their clients make major gifts while the 2012 exclusions were in place. During that window of opportunity, an individual could make a gift of slightly more than $5 million without incurring estate or gift taxes, and a couple could make a gift of slightly more than $10 million. As a result of these concerns, a lot of gifts were made in 2012.
Finally, with the American Taxpayer Relief Act adopted at the beginning of 2013, we have something that Congress is calling a “permanent extension” that provides some reasonable guidance for making future plans. These relatively high levels of exemption base ($5 million/$10 million) have been continued under the new legislation. The portability of the exemption — meaning that if a spouse dies without using his or her exemption, the surviving spouse can (under specific rules) make use of the full $10 million exemption — has been continued.
In this region with our high real estate values, it does not take too much property to reach a $1 million value. Had the rules reverted to 2001 exemption levels, anything more than an individual’s
$1 million estate would have been subjected to a high tax rate and could have required the sale of real estate or other major assets to be able to pay the taxes. With the American Taxpayer Relief Act leaving the basic exemption at $5 million and with the portability feature allowing for an estate in excess of $10 million to be passed along to a next generation, most estates (and many farms and ranches) will be able to avoid taxation. The American Taxpayer Relief Act provisions will allow a ranch or a farm to be passed along to family members without forcing the sale of the ranch or farm to pay taxes.
Finally, it is important to remember that even with the American Taxpayer Relief Act, the estate tax rules remain complex and will vary in different circumstances. This column should not be relied upon as legal advice or as tax advice for any individual situation. You should consult with your adviser on the significance of the American Taxpayer Relief Act to your situation.
Rich Tremaine is an attorney in Steamboat Springs and a member of the Community Agriculture Alliance’s advisory board. He provides occasional comment on estate tax issues.