The guidelines that are utilized by the Internal Revenue Service to collect estate and gift taxes were defined anew by the enactment of the American Taxpayer Relief Act of 2012.
In 2011 a $5 million exclusion was put into place with an adjustment for inflation to be added in 2012. This adjustment brought the 2012 exclusion up to $5.12 million. The maximum rate of the estate and gift taxes during those two years was 35%.
Now that we are working under the terms of the aforementioned American Taxpayer Relief Act of 2012 we have a slightly altered framework. The exclusion has remained constant, and after the latest adjustment for inflation we have a $5.25 million exclusion in 2013.
In spite of the fact that this piece of legislation is called a “taxpayer relief act,” it included an increase in the top rate of the federal estate tax, the gift tax, and the generation-skipping transfer tax to 40%.
Unlike parameters that were put into place in the recent past this framework carries no sunset or expiration date, so pundits have referred to this arrangement as being “permanent.” This is really not an accurate definition because nothing is permanent in the realm of taxation. Legislation can always be passed that alters the landscape.
In fact, these parameters are already being threatened. The president has announced his budget plans for 2014, and an increase in the estate tax is part of the plan.
This budget proposal would increase the top rate of the estate tax to 45% in 2018, and at that time the exclusion would be reduced to just $3.5 million.