Changes to Federal Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax
How Changes to the Law Affect Tax Liabilities – Some History
Economic Growth and Tax Relief Reconciliation Act of 2001 (or EGTRRA)
There have been a number of changes to the federal law regarding estate, gift, and generation-skipping transfer tax since the early 2000’s. These changes affect how, when, and how much federal tax is imposed on a person’s estate. Estate planning attorneys have had to keep up with the changes in order to help their clients effectively manage estate taxes.
In 2001 President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 (or EGTRRA). The effect of this law meant that for persons dying after 2001, EGTRRA gradually reduced the maximum federal estate, gift and generation-skipping transfer tax from 55 percent to 45 percent in 2007 to 2009. For those dying after 2009, EGTRRA eliminated the Federal Estate Tax and Generation-Skipping Transfer Tax, but not the Federal Gift Tax. By the way, a Generation-Skipping Transfer Tax is one imposed on gifts that skip a generation such as where a grandparent gives an inheritance directly to a grandchild. In 2010, the Gift Tax was to be set to the highest federal income tax rate. These provisions were set to “sunset” or expire December 31, 2010. This means that people dying after December 31, 2010 were subject to – or more accurately their estate was subject to the pre-EGTRRA rules and amounts.
Along Comes the “2010 Tax Act”
The president signed the so-called “2010 Tax Act” (or sometimes “2010” Act) – not surprisingly – in 2010. This was set to expire December 31, 2012. These guys always seem to kick the can down the road! Oh well. What this legislation did was that it increased the exemption amount to five million, reunited the lifetime gift with the estate tax exemption and was also set at five million. Moreover, it also set the generation-skipping transfer tax to five million. The estate, gift and generation-skipping transfer tax rate was set to 35 percent. The 2010 Tax Act also introduced portability of unused estate tax and gift tax between spouses where previously if it were unused by the spouse it was lost. What this means is that with the estate tax exemption set to 5 million, a spouse could give the other spouse up to 5 million on their passing free of any federal estate tax. When the second spouse died, they could give up to 10 million dollars to an heir free of any federal estate tax. Under the old rule, if the first spouse only gave the second spouse 1 million, the second spouse could only give 6 million to the heirs free of any federal estate tax. Portability means that this 4 million that was unused by spouse one can be utilized by spouse two. This portability didn’t apply to the generation-skipping transfer tax like it did to the estate tax and gift tax.
Now ATRA is Signed
This new legislation was signed in 2013 and “solidified” a few things. The law increased the top marginal tax rate for estate tax, gift tax, and generation-skipping transfer tax from 35 percent to 40 percent. It reaffirmed portability as well as the 5 million exemption for estate, gift, and generation-skipping transfer tax and is indexed for inflation. The new law also included a deduction for any state death taxes, and increased the top marginal income tax rates for individuals and Trusts and Estates from 35% to 39.6%. It was also not set to sunset. But who knows what the politicians will do. Candidate Bernie Sanders has indicated he wants to lower the exemption amount and increase the top rate to somewhere around 65%. I don’t know how you feel about it, but this is money that an individual earned, paid taxes on, had the discipline to save and the want to take care of loved ones with, and now the government wants to take more than half! Wow, what did they do to have the right to take that money? Well, they work for us… we have to fire them!
Please see the rest of my Blog for more on Federal and California Estate Tax
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Thank you for reading!
William Daniel Powell
Just like my website, nothing in this blog is intended as legal advice. If you need legal advice, contact an attorney licensed to practice in your jurisdiction. I am licensed to practice law in California. Further, please remember that I speak in generalities in my blog (and on my website). There are so many different factors that can contribute and completely change the outcome that it would not be practical to discuss all of them here. This is why I speak in generalities. Thanks again for reading.
This document is for informational purposes only. Nothing in this is to be considered legal advice. Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship. If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction. I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information.