The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“TRUIRJCA” or “TRA 2010” for short) was signed into law by President Obama on December 17, 2010. TRA 2010 provided many changes in the federal estate tax and gift tax rules. However, these changes were only a temporary set of rules for years 2010, 2011, and 2012. If Congress and President Obama take no action before the end of the year, the federal estate tax and gift tax law will revert to the law that was in effect back in 2001.

(If you would like to talk to a Sugar Land estate planning attorney about how changes in the federal estate tax and gift tax law might affect you, contact Sugar Land estate planning attorney Paul Romano.)

What are the Estate Tax and Gift Tax Options for Congress in 2013?

Do Nothing:

If no action is taken, here is how the law will change from this year to next year:

Year          Estate/Gift Tax Exemption          Estate/Gift Tax Rate

2012                      $5,120,000                                    35%

2013                      $1,000,000                                    55%

In other words, in 2013 the maximum amount that you will be able to give away during your lifetime or at death that will be exempt from estate taxes will drop from $5,120,000 to $1,000,000. Additionally, the rate at which amounts exceeding the exemption are taxed will rise from 35% to 55%. Doing nothing is a real possibility (50/50) given the level of partisan gridlock that we have seen over the past 2 years and the fact that we have a lame duck Congress right now.

Repeal the Estate Tax

There is about a 0% chance this will happen.

Extend TRUIRJCA

This option would result in an extension of the 2012 rates for one year. There is a 50/50 chance this option will occur.

Pass a Compromise Bill

A compromise bill is not likely to happen before the end of the year with a lame duck Congress; however, I do believe that one will be passed before the end of 2013. Obama has pledged to raise taxes on the wealthy, and I do not believe he will back down on this pledge after his victory in the election. The Republicans have taken an oath not to raise taxes and allowing that to happen would be political suicide.

Allowing a reduction in the estate tax exemption and/or raise in the estate tax rate may be the least painful way for both sides to compromise. If the estate tax exemption and estate tax rate compromise ends up being somewhere in between the 2012 (2013 if there is a 1 year extension) and the 2001 levels then the Republicans can claim victory by saying they helped avert a return to 2001 while Obama can also claim victory by claiming that taxes on the rich will go up after 2013.

Contact Sugar Land estate planning attorney Paul Romano for more information on how to plan for the uncertainty of the future of the estate tax.