Estate Tax Rates: Exemptions

Estate Tax Rates and Exemptions for 2013 – The future of the “death tax” is up in the air. I’m going to go over some of the proposed changes in the Estate and Gift Taxes and what they might mean for you, how you can plan in anticipation of these changes, and what could happen if you don’t.


Let’s start with the worst-case scenario and move on from there. Without government action:

  • Estate and Gift Tax exemption will fall from $5.12M to $1M
    • That means: An individual will be able to give away (or die owning) $1M in assets during his lifetime tax-free; a couple will be able to give away $2M, down from $10.24M.
  • Generation-Skipping Transfer (GST) Tax Exemption will fall to $1.34M
    • That means: Gifts (either lifetime or by will) to grandchildren and others defined as “Skip-persons” for purposes of the GST Tax will be taxed after the first $1.34M. The GST tax is imposed in addition to any Estate/Gift Taxes charged on the transfer.
  • Highest Estate/Gift Tax rate will increase to 55% (from 35%)
    • That means: in addition to having less of an exemption to work with, taxpayers will be required to shell out more in taxes for every dollar of gifts/bequests made to their friends and family members.


President Obama sent Congress a budget proposal on February 13, 2012 that takes a slightly different approach to the issues laid out above.


These are the changes proposed by the President:

  • Estate Tax Exemption of $3.5M instead of the automatic drop to $1M
    • That means: Individuals will be able to devise up to $3.5M by will. The current law allows for portability, which the President’s proposal preserves. If this proposal becomes law, then a surviving spouse will be able to exclude assets from his/her estate in the event that the first-to-die spouse has an estate of less than $3.5M.
  • Gift Tax Exemption of $1M
    • That means: The ability to avoid Estate/Gift taxes by making lifetime gifts will be dealt a severe blow if this proposal is adopted. Currently, the “unified credit amount” allows couples to take advantage of lifetime gifts to give away assets that they expect to appreciate over time and to avoid probate. Under the president’s proposal, Estate Planning Attorneys will need to ensure that more assets are taxable as part of an individual’s estate at the time of his/her death instead of being taxable as lifetime gifts. This decoupling of the Gift/Estate tax exemptions will make planning more difficult, but it will not and should not keep wealthy taxpayers from using gifting as a integral part of Estate Planning.
  • Generation-Skipping Transfer Exemption of $1.34M
    • That means: if you are going to set up a trust to provide for future generations of descendants, it will be a lot harder to do after 2013. Both under the President’s proposal and the automatic reset of the Estate/Gift Tax laws will have the same result on those seeking to avoid an additional tax on gifts/devises to younger generations.
  • Estate/Gift Tax Rate of 45%
    • That means: President Obama’s proposed a rate that is lower that the rate that will automatically go into effect for gifts/devises starting in 2013. But the rate is higher than it is right now.
  • Grantor Retained Annuity Trusts – Term increased to 10 years
    • That means: a popular method of planning is going out the window if this change takes effect. Right now, a method is available whereby the creator of a trust can “retain” an annuity from the trust for 2 years, reducing the value of the actual “gift” he makes to the trust by the value of the annuity. As long as the trust pays the Grantor an appropriate amount of interest and principal over the two-year term, then it is as if he did not make much of a gift at all. By increasing the term of the GRAT to ten years, the value of the GRAT is diminished greatly.
  • IDGT Trust is Basically Eliminated as an Estate Planning Tool
    • That means: the benefits to creating a trust where the Grantor pays the income tax on the income of the trust will be eliminated through various disincentives built into the Estate Tax Code.
  • The end of Dynasty Trusts
    • The GST exemption would only apply for 90 years following the creation of a trust. As a result, wealthy families will no longer be able to shelter assets by making use of the GST exemption for future generations to come.


The bottom line is this: if you have more than $1M in assets, you should start planning today. If you wait until after January 1, 2013, you may find that your options are severely limited. Plan ahead and you can keep your hard-earned wealth out of the hands of the government in the hands of those you love the most.


If you're unsure of how to proceed with planning, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.