The Uncertainty of Federal Estate Tax Rules for 2013 and Onward

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After two years we are in the same place as we were in 2010: watching and waiting on what will be done with the Federal Estate and Gift Taxes (the "Transfer Taxes"). After the Economic Growth Tax Relief Reconciliation Act ("EGTRRA") rules from 2001 to 2010 and the patch work of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "TRUIRJCA") passed on December 17, 2010, the patch is about to lapse to the pre-EGTRRA rules. See TRUIRJCA (http://www.gpo.gov/fdsys/pkg/PLAW-111publ312/pdf/PLAW-111publ312.pdf) Most importantly, this means the Estate Tax Exemption would drop from the current $5,120,000 to $1,000,000 and the maximum tax rate would increase from 35% to 55%. This would greatly increase the Transfer Taxes payable by privately held business owners with large estates.

The 2011-2012 TRUIRJCA rules postponed the sunset of EGTRRA. It provided an Estate Exclusion of $5,000,000 indexed for inflation for 2012, a Gift Tax Exemption that matches the Estate Tax Exemption, a marital portability of the exemption, and a maximum estate tax rate of 35%.

The temporary TRUIRJCA Estate and Gift Tax Exemptions of $5,000,000 (indexed up to $5,120,000 for 2012) allowed for tremendous wealth transfer opportunities. Secondly, it provided for a portability of the exemptions between spouses. In other words, a surviving spouse is permitted to use any unused exemption of a predeceased spouse if the predeceasing spouse's executor makes the proper election on the deceased spouse’s federal estate tax return. This is important if the majority of the assets are titled in the name of one spouse and the less wealthy spouse dies first. Otherwise, the exemption is wasted. Under portability an asset owning surviving spouse may now use the unused exemption to receive a total exemption of $10,000,000. Finally, while the pre-EGTRRA maximum tax rate was 55%, the TRUIRJCA capped the tax rates at 35%.
This provides substantial opportunities to gift or bequest assets out of an estate tax free or at tax preferred rates. This rule is to sunset on December 31, 2012, which would leave an estate tax exemption of $1,000,000 and a maximum rate of 55%.

Uncertainty in 2013:
There is much uncertainty and speculation as to what the final 2013 estate and gift tax rules will be. The possible options are: 1) allowing the TRUIRJCA to lapse; 2) a continuation/modification of the TRUIRJCA/EGTRRA rules; 3) a complete repeal of the Wealth Transfer Taxes; or, 4) a completely new scheme.
If Congress does not act by 2013, as stated, the TRUIRJCA sunsets. This means, the federal estate and gift tax exemption drops down to $1,000,000, the maximum marginal tax rate goes back up to 55%, and a loss of the spousal portability. This would cause a tremendous increase in Wealth Transfer Taxes in taxable estates above $1,000,000.

The second option is the TRUIRJCA rules with a higher maximum tax rate, a lower exemption amount, and keeping the spousal portability. For instance, President Obama's 2012 proposed amendment is a permanent $3,500,000 exemption and a maximum tax rate of 45% with portability. There was another proposal in fall 2011 called The Sensible Estate Tax Act of 2011 with a $1,000,000 exemption indexed for inflation from 2000, a maximum tax rate of 55%, and portability. Neither were passed, but it seems most proposals were some form of a TRUIRJCA/EGTRRA increased exemption with portability.
Third, Congress could simply repeal the Wealth Transfer Taxes. This is highly unlikely with the current political state of the economy and the .99% versus the .01% mentality.
Fourth, Congress could throw us a curveball and add new features. They could scrap the current frame work, add in different types of exemptions or tax in a different manner. It is speculative whether any major changes will be added considering it is an election year and the preoccupation with boosting the economy and healthcare.

Lastly, Congress could allow it to lapse if there is a Congressional stalemate.

It is the opinion of this office with the .99% versus the .01% mindset of the country that a modification of the TRUIRJCA/EGTRRA rules will be the 2013 rule considering the most recent proposals and the fact Congress is preoccupied enough with the economy and focusing on elections to make any drastic changes. However there is uncertainty to what the exemption be or the maximum tax rate will be. This could range from $1,000,000 to $5,000,000 and 35% to 55% depending on the deal struck in Congress. Spousal portability has stuck on the prior proposals, but this could also be changed. See 2013 Federal Estate Tax: The .99% Verses the .01%.(http://www.forbes.com/sites/matthewcampione/2012/06/29/2013-federal-estate-tax-the-99-verses-the-01/ )

Conclusion:
There is much uncertainty about the future state of the Wealth Transfer Tax system for 2013 and going forward. The best way to prepare for this is to take advantage of the current favorable 2012 treatment, if possible, by using the $5,120,000 exemption by gifting before it is possibly lost forever. If the rules become more relaxed, then this can be addressed in the future, but if they tighten back to pre-EGTRRA rules, the current 2012 estate tax advantages have been locked in.    

Pozzuolo Rodden, PC provides specialized cost-effective legal services to privately held business owners and high-net-worth clients in Pennsylvania and New Jersey in excess of 35 years.    
Pozzuolo Rodden, PC
215-977-8200
http://www.pozzuolo.com

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Joseph R. Pozzuolo, J.D., B.B.A.
Pozzulo Rodden, PC
215-977-8200
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