August / September 2016

August/Septemeber 2016 Issue

Top 5 Tax Issues for Retirement

Sidney Kess, CPA, J.D., LL.M.

Retirement is life changing in so many ways, and it is different for different people. For some it means downsizing and relocating. For others it means reduced work schedules, ceasing...


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Tax Strategies

Top 5 Tax Issues for Retirement

Sidney Kess, CPA, J.D., LL.M.

Retirement is life changing in so many ways, and it is different for different people. For some it means downsizing and relocating. For others it means reduced work schedules, ceasing...


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Contribute An Extra $1,000 to Your IRA and An Extra $6,000 t…

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If your client is age 50 or older, he or she may be able to contribute extra amounts to their retirement plan. While these are called “catch-up” contributions, a taxpayer...


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It has taken the Department of Labor (DOL) almost two years to release the final regulations requested by President Obama. The DOL press release announcing the final regulations indicates: “This long-awaited...


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Joshua Fluegel

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Tax Tips for 2012 and 2013

Estate and Gift Taxes: 2012 and 2013

Estate and gift tax planning in the era of uncertainty is very challenging. Federal tax rules are not set beyond 2012. Political considerations make it unclear whether any certainty can be introduced before the election in November. Here are how the rules for estate, gift, and generation-skipping transfer taxes stand for 2012 and the proposals that have been made in President Obama’s 2013 budget as well as by Republican candidates stack up.

2012 transfer tax rules

For decedents dying in 2012, there is an exemption of $5,120,000 (the $5 million that had applied in 2011 has been adjusted for inflation) (Rev. Proc. 2011-52, IRB 2011-45, 701). Taxable estates over the exemption amount are subject to a flat 35% tax rate (Code Sec. 2001).

In the case of married couples, if one spouse dies, the other can add the unused portion of the deceased-spouse’s exemption amount to his/her own if an election is made (Code Sec. 2010(c)(5)(A)). For example, if a husband died in 2011 and used only $3 million of his $5 million exemption amount, his surviving spouse could add his unused $2 million amount to her exemption. If she died in 2012, her exemption amount would be $7,120,000 (her $5,120,000 + $2,000,000 from the husband). This rule is referred to as portability and is set to apply only for decedents dying before 2013. (Technically, it is called the deceased spousal unused exclusion amount, or DSUE amount.) In order to use portability, the deceased-spouse’s estate must file a federal estate tax return, even if the value of the gross estate is below the filing threshold of $5,120,000.

The same exemption amount in 2012 applies to lifetime transfers as well as to generation-skipping transfers (Code Sec. 2631). Also, the same 35% flat tax rate applies to taxable transfers in excess of the exemption amount (Code Sec. 2601).

The lifetime gift tax exemption amount, like that for estate tax and generation-skipping transfer tax, is $5,120,000 for 2012 (Code Sec. 2505). Again, the same 35% flat tax rate applies to taxable gifts in excess of the exemption amount (Code Sec. 2502). In effect, the gift tax is unified with the estate tax for 2012.

President’s proposed changes

In the 2013 budget proposals (, there would be sweeping changes to estate, gift, and generation-skipping transfer taxes. Here are the changes that would result if the proposals were adopted:

            Exemptions. The exemption amount for estate tax and generation-skipping transfer tax would be reduced to $3.5 million (the same exemption amount that had applied in 2009). The exemption amount for gift tax would be reduced to $1 million (the same exemption amount that applied in 2010).

For trusts created after enactment of these proposals, there would be a time limit on the exemption to prevent trusts from appreciating in value in perpetuity free of transfer tax. The generation-skipping transfer tax exemption would end on the 90th anniversary of the creation of the trust. For a trust created before enactment, the time limit would apply only to additions to the trust made after enactment.

            Tax rate. Taxable amounts would be subject to a flat 45% tax rate (the same rate that had applied to estate tax in 2009).

            Portability. The ability of the surviving spouse to use the other spouses unused estate tax exemption amount would be made permanent.

            Valuation discounts. Currently, the value of interests in closely-held businesses transferred in life or at death has been discounted for lack of control and marketability. These valuation discounts would be restricted in the case of family situations.

            GRATs. Currently, individuals can save on transfer tax costs by using grantor retained annuity trusts (GRATs) in which the term of the trust is kept very short (two years) and the annuity interest is significant enough to set the gift tax value of the remainder interest at or near zero. As long as the grantor survives the short term, the appreciation in the trust passes to the remainder interest with no additional transfer tax costs. This technique of zeroing out the gift in a GRAT would be eliminated by two changes: (1) requiring a minimum annuity term of 10 years (if the grantor fails to surviving this term, the trust assets are included in his/her estate), and (2) setting the value of the remainder interest at more than zero (although the minimum value had not been determined in the proposal).

            Grantor trusts. The tax rules for grantor trust would be changed in several ways, and would primarily affect planning for intentionally defective grantor trusts (IDGTs). Assets in the grantor trusts would be included in the grantor’s gross estate. Distributions from the trust during the life of the grantor would be subject to gift tax. If, during the grantor’s life, he/she is no longer treated as the owner of the trust for income tax purposes, this event would trigger a gift tax on the assets in the trust. The changes would apply to trusts created after enactment as well as any additions to trusts existing prior to enactment.

            New reporting rules. New information reporting would be imposed on executors of estates and donors of lifetime gifts. They would have to provide to the recipient and the IRS information about valuation and tax basis.

Republican proposals

 All of the Republican presidential candidates would repeal the federal estate tax. Repeal of the federal estate tax is not a new proposal; there have been numerous bills (several passed by the House) to eliminate the federal estate tax (most recently the American Opportunity and Freedom Act of 2012, H.R. 3804, which would repeal the federal estate tax and generation-skipping transfer tax retroactive to 2010). There have been no specific comments on gift tax.

What happens if no proposals are adopted

Unless there is Congressional action adopting the President’s proposals, the candidates’ proposals, or some other measure, the transfer tax rules would return to pre-Bush era levels. This means that the estate tax exemption would drop to $1 million in 2013. The graduated federal estate tax rate would return, with the top rate set at 55%.

What is likely to happen? No one is sure at this time. It may be possible for Congress to simply extend the current transfer tax rules for one year or more. This would mean that the exemption amount could be increased by an inflation adjustment; the flat tax rate would remain at 35%.

What to do

While Congress may be stalled, individuals still need to continue their estate planning during this era of uncertainty. Unfortunately, it is easier said than done. Individuals may be averse to spending money on estate planning assistance now if they expect that they will need to redo their plans after November or next year when Congress takes action on rules for 2013 and beyond.

Some specific strategies that can be utilized:

            Lifetime gifts. Wealthy individuals who can afford to make sizable transfers may want to take advantage of the current gift tax exemption amount. It may never be this high again.

            GRATs. Until enactment of new law, GRATs continue to provide a transfer tax opportunity. Zeroed out GRATs set up before enactment likely will be grandfathered to produce the desired tax-saving effect.

            GSTs. Generation-skipping transfer trusts can still be structured to provide tax-free transfers in perpetuity. Again, existing trusts likely will be grandfathered and will not be subject to limits enacted in the future.


Attorneys who provide estate planning for clients should apprise them of possible tax law changes that could impact current estate plans. Changes to estate plans should allow for flexibility to make future changes as new laws dictate.

Sidney Kess, CPA, J.D., LL.M., has authored hundreds of books on tax-related topics. He probably is best-known for lecturing to more than 700,000 practitioners on tax and estate planning.

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