It has often been said that the only things in life that are certain are death and taxes. Until two weeks ago, the “taxes” part of that phrase was not so certain. However, on January 2, 2013 President Obama signed the American Taxpayer Relief Act of 2012 (“ATRA”). While the primary focus of ATRA is on income taxes, it also makes the federal gift tax, estate tax and generation-skipping transfer (“GST”) tax exemptions permanent at $5 million, indexed for inflation (the 2013 exemptions are $5.25 million). If you were unable to make gifts in 2012, you are in luck and can still take advantage of the historically generous exemption amounts. The estate and gift tax regime will remain “unified,” meaning that the $5.25 million exemption can be used either during lifetime or at death. The news is not all good, however, as the tax rate for federal gift, estate and GST tax purposes increased to 40%.
As a result of the inflation adjustment, the federal gift tax, estate tax and GST tax exemptions increased by $130,000 this year. This will permit individuals who previously used gift tax exemption to make an additional $130,000 of tax-free gifts. Married couples can make additional gifts of $260,000 this year without incurring gift tax.
Not everyone is in a position to make large gifts to maximize their gift tax exemption. For those people, there was other good news in the recent tax legislation. In addition to addressing the gift, estate and GST tax exemption and rates, ATRA also makes “portability” permanent. Portability allows a deceased spouse’s unused estate tax exemption to be transferred to the surviving spouse so that he or she can use the deceased spouse's unused exemption plus his or her own exemption when the surviving spouse later dies.
One more bit of good news on the estate tax front - the Illinois estate tax exemption also increased at the beginning of the year. Pursuant to legislation Governor Quinn signed in 2011, the Illinois estate exemption increased to $4,000,000 for persons dying in 2013 and beyond with a maximum rate of 16%. As a result, Illinois residents will be able to leave larger amounts to family members at death without the imposition of Illinois estate tax.