Analysis Of The New Federal Estate Tax Law

On January 1, 2013, President Obama signed into law The American Taxpayer Relief Act of 2012 (“ATRA”), bringing closure to the main tax aspects of the so-called “fiscal cliff” negotiations that have been ongoing since the November elections.

Among its many tax provisions, ATRA makes permanent the $5.0 million gift, estate, and GST tax exemption amount that was put in place temporarily for 2011 and 2012, plus inflation adjustments going forward [the IRS has issued its official guidance for the inflation adjustment for 2013 as $5.25 million per person. For married couples in 2013, the aggregate exemption will be twice this amount (i.e., $10.5 million)]. Future years will likewise have similar inflation adjustments.The gift tax is still unified with the estate tax; a unified estate and gift tax exemption means the $5.25M threshold is applied to total transfers, whether by gift during lifetime or by inheritance on death. The 2012 Act also provides for a flat 40% tax rate for any transfers in 2013 and future years that exceed the $5.25M gift, estate, or GST exemption amount. There is also an inflation adjustment to increase the annual gift tax exclusion from $13,000 to $14,000 per donee (again, for married couples, the annual gift exclusion is now double this amount – $28,000 for 2013).

The new law is “permanent” because there is no sunset provision in the law that would cause the current rules to expire. EGTRRA was scheduled to sunset at the end of 2010. Similarly, TRA 2010 was scheduled to sunset at the end of 2012. But a “permanent” change does not mean the law will never change. The word “permanent” really means “until they change it next time!” Similarly, as one commentator writes, “‘Permanence’ is welcome. But that welcome relief lasts only until Congress decides to change it. With the important and intense debates Congress has before it, it would be naïve to assume that Congress is done making changes to the tax law, even to the estate tax.”

Notably, ATRA also makes permanent the “portability” concept whereby the unused estate tax exemption amount of the first spouse to die can be passed to the surviving spouse for later use by the surviving spouse (either during life or at death). For example, if the first spouse passes away in 2013 with $2.25 million of assets, that deceased first spouse will have a $3 million “unused estate tax exemption amount,” which can be passed to the surviving spouse. This would give the surviving spouse a total of $8.25 million of gift and estate tax exemption going forward, subject to further limitation if a later marriage occurs.

 The biggest argument in support of portability is that it will prevent married couples from having to create “costly” estate plans that contain “complex” trusts. But not so fast! Portability is really a “get out of jail card” for those who don’t do anything or if the totally unexpected should occur; there are a number of reasons for married clients (and “non-traditional couples”) to still create an estate plan which creates a trust or trusts after the first death:

1. Can be lost. Pursuant to §2010(c)(5)(A), in order to claim portability, it is necessary for to file an election on a Federal Estate Tax Return (IRS Form 706), within the time prescribed by law (including extensions), for the estate of the first spouse to die even if an estate tax is not due. Not only is it very possible that many will not file, there will be a cost attached for those who do.

2. Planning to “lock-in” the full exemption. As mentioned, since the new law is only as “permanent” as Congress wants it to be, having an exemption trust will protect the full $5.25M amount if one spouse dies and the Democrats are later successful in “rolling-back” the exemption to $3.5M. Portability may also be lost if the surviving spouse remarries and is later widowed again.

3. Planning for appreciation. Funding an “exemption trust” also protects appreciating assets from estate tax at the survivor’s death.

4. Planning for blended families and/or “control”. For a second/third marriage (or even for a first marriage), if one or both of the clients is concerned with the survivor being able to change the beneficiaries (e.g., remarriage, separate children, etc.), the irrevocable trust is still necessary (even when there are no tax issues).

5. Providing creditor protection for the surviving spouse. Creating an irrevocable trust at the first death provides asset protection from creditors, lawsuits and/or Medicaid “spend-down”. In addition, any assets owned by an irrevocable trust will be protected from a divorce settlement if the surviving spouse remarries and then later divorces.

6. Planning for state estate taxes. Currently, there are 16 states plus the District of Columbia that still impose their own estate tax (i.e., “de-coupled”), so trust planning may be necessary in order to “double” the state exemption and defer payment of state estate taxes until the death of the surviving spouse (so far, no state with an estate tax has adopted the concept of “portability” for the unused exemption of the first to die). Even if the client resides in a state currently without a separate estate tax, that state may subsequently elect to de-couple or the survivor may, after the first death, indicate that there is a possibility of moving to a state which doe have a separate state estate tax (e.g., move to be closer to children).

7. Planning for the “generation-skipping tax”. Portability does not apply to the GST tax, so in order to fully leverage the GST exemptions of both spouses for GST trust planning, it will still be necessary to create a trust at the first spouse’s death.

8. Planning for same sex or unwed couples. Until same sex marriage is recognized by the federal government, same sex couples will need to use trust planning in order to be able to take full advantage of the exemption (state and federal) at both deaths (and the same goes for unwed couples).


Many times there are important reasons to create an irrevocable trust after the first death, even when there are no estate tax issues; some of these reasons could be children by separate marriages, a concern about remarriage by the survivor, establishing some creditor protection, provide some protection from Medicaid “spend-down” requirements, etc. The problem with creating a typical irrevocable trust after the first death (i.e., an “A/B Trust”) is the loss of the basis “step-up” on the assets in the irrevocable trust at the second death. We have created the template (as an option during the interview) for a new type of estate planning trust; this template creates a “marital deduction trust” at the first death which, although irrevocable, will still be included in the survivor’s taxable estate (which is “presumptively” under the exemption level) and, therefore, the assets in this trust will be eligible for the second step-up (think of it as an “intentionally defective” decedent’s trust). To make sure there are no unexpected surprises, the template also includes a disclaimer “Exemption Trust” if necessary (the decision to fund this trust can be made up to nine months after the first death).

We have prepared a “matrix” of the different client scenarios with our recommendations for the appropriate type of estate planning trusts (i.e., a “Probate Avoidance Trust”, a “Disclaimer Trust”, an “A/B Trust”, a “Marital Deduction Trust”, “QTIP Trust” (with or without the “Clayton Election”) and a “Qualified Domestic Trust” (“QDOT”) — all of which are included in our software] which may be appropriate for each scenario. Of course, this matrix takes into account the existence of a separate state tax [the specific state “exemption” amount and the use of a state QTIP {if permitted under state law) is incorporated into the software].


These significant gift and estate tax law changes will hopefully bring a degree of stability to an area of tax law that has been under constant revision and uncertainty for the past twenty years. However, estate planning remains relevant, even with a “permanent” $5.25 million for individuals ($10.5 million for couples). “For those who think estate planning no longer is relevant because they are safely under the $5 million inflation adjusted exemption amount, think again. Estate planning never was only about federal estate taxes.”There are many non-tax reasons to plan, including:

• Asset protection through trusts, entities, pre-nups and post-nups
• Planning for disability through health care powers, powers of attorney, and HIPAA authorizations
• Reviewing beneficiary designations (in life insurance policies, IRAs other retirement accounts, annuities) and coordinating them with the estate plan (including an IRA Beneficiary Trust)
• Avoiding probate
• Expressing wishes for the transfer of assets in a will, beneficiary designations or a revocable living trust
• Preserving and passing down values through tools such as a letter of values and an incentive trust
• Ensuring beneficiaries enjoy the benefits of the estate plan even if they cannot manage assets through tools such as spendthrift trusts and special needs trusts
• Planning for business succession