There is some justifiable concern regarding the uncertainty of the estate tax, particularly with regards to the recent presidential election.  The 2012 Election was full of promises and plans from both sides advocating change. With so much uncertainty in the air it’s hard to know which way is up. Here we lay out for you the system as it currently stands, and the potential changes that Obama’s re-election and the coming months might bring.

As they currently stand

Under the current law, the federal gift tax, estate tax, and generation-skipping transfer (“GST”) tax exemptions and rates are unified. So the federal government has granted a lifetime and beyond exemption, allowing a certain amount of money to be gifted, or left as bequest/inheritance free of tax. Once that exemption amount is reached you will have pay gift taxes, or your estate will face estate taxes on any value above a certain amount.

The federal estate tax exemption is $5.12 million in 2012, and the estate tax rate is 35%.  This means that anyone whose estate is below $5.12 million is exempted from the estate tax, and if your estate is larger than the $5 million exemption, you only have to pay taxes on the amount in excess of the exemption. The unified nature of the taxes means that the lifetime gift tax exemption and the generation-skipping transfer tax exemption are $5.12 million each.  The tax rate for the gift tax and the GST tax are each currently 35%.

California does not currently collect estate tax at the state level, so for 2012 only the Federal Estate tax is relevant. This will not be the case as of Jan. 1st 2013, absent Congressional action.

As they will stand on Jan. 1 2013 absent any action

As the laws currently stand on January 1, 2013 the TRA 2010 will expire and estate tax rates will return to those active in 2001. This means that the exemption rate will drop to $1 million. Additionally the estate tax rate will increase from the current 35% to 55%, as it was in 2001.

California will again have a state-level estate tax in 2013. In 2001 CA had a ‘pick-up” tax which does not present an additional tax on decedent’s estates, but rather allocates a portion of the amount paid for the Federal Estate tax, to the state of California.

Obama’s Win

President Obama has indicated that his plan is to reinstate the estate tax at 2009 levels, which would result in a $3.5 million exemption and a top tax rate of 45%. This is a 1.62 million reduction in the estate tax exemption, and a 10% increase in the tax rate on everything above the new lower exemption.

Under President Obama’s proposal, the lifetime gift tax exemption and rate would be restored to $1 million and the gift tax would be increased to 45%. The GST tax exemption would be set at $3.5 million, and the tax rate at 45%.

His proposal also requires at that grantor retained annuity trusts (GRATs) have a minimum term of 10 years, which increases the odds that the grantor die during the term, and thus undoes the estate and gift tax saving the GRAT created. The length of time that a Dynasty Trust can remain estate tax free would also be limited to 90 years under the President’s proposal.

President Obama has also proposed to include trust assets in the gross estate of a decedent, if the income tax rules treated him as the owner of such trust. While this proposal made clear that any changes would only apply to trusts created post-enactment, this would still have a serious impact on Intentionally Defective Grantor Trusts.  However, these are only proposals, and Congress will have the opportunity to weigh in on the matter before President Obama can sign anything into law.

Wild Card – Congress takes Action

Congress has begun to address these issues previously, and has  addressed neighboring tax issues and deliberately avoided touching the Estate tax, but has yet to actually legislate any changes.

On August 1, 2012 the House passed the Job Protection and Recession Prevention Act, which extends all of the Bush-era tax rules through 2013, and includes a one year extension of the 2012 estate tax rules.  However it was only shortly thereafter that Congress adjourned and nothing was accomplished with regards to this bill following the return after Labor Day. As these rules are not in line with President Obama’s proposals, and the democrats control the Senate and the House following the Nov 6th election, there seems little likelihood that Congress will pass the bill now.

It is difficult to know which direction Congress will go from here, but it seems unlikely that they will accomplish anything that prevents the expiration of the TRA 2010 before January 1, 2013. However it is possible, as they did in 2010, for Congress to pass a bill later next year and retroactively apply the law from January 1, 2013.


It will be interesting to see what the coming weeks, and newly re-elected President Obama will bring to the table. Despite the fact that the future is flux, it is never too soon to begin planning your estate. There are means and measures that can be utilized to adapt to the changing laws. If everything that President Obama proposed should be enacted however, it might eventually be too late for some estate planning tools, as you will have lost the window to be grandfathered in under the current, more favorable trust laws.

Disclaimer: The information on this blog is provided for general informational purposes and is not legal advice. Information contained in this blog, the comments, or any correspondence with the author or others do not create an attorney-client relationship and are not a substitute for professional legal advice from a licensed attorney in your jurisdiction.

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