Issued by Gary Hoff, Tax School and Department of Agricultural and Consumer Economics, University of Illinois
The American Taxpayer Relief Act of 2012 addressed many of the tax issues concerning taxpayers. ATRA made permanent many of the tax provisions that were scheduled to expire. For example, it provided a permanent exemption amount for the alternative minimum tax and, more importantly, it indexed it for inflation.
In the estate tax area, ATRA made a $5 million federal exemption permanent and also indexed the exemption for inflation. For deaths in 2013, the exemption amount is $5.25 million. This provides relief for many farm families and will mean the farm can pass to the next generation. It also made the portability permanent. Portability allows an estate to pass through any unused federal exemption to the surviving spouse. The following example illustrates how portability works.
University of Illinois Farmdoc explains with examples why estate and farm succession plans need regular updating
Oliver and Lisa owned a farm in Hooterville. Oliver had an estate valued at $1 million and Lisa has an estate valued at $7 million
due to an inheritance from her Hungarian parents. Oliver died in 2013. His estate will have no federal estate tax and has a $4.25 million excess federal exemption amount. If the executor of Oliver's estate files an estate return, they can elect the portability provision and pass the unused $4.25 million exemption amount to Lisa. Assuming Lisa has not remarried before her death, she can have a federal estate of $9.5 million ($5.25 million + $4.25 million) without having an estate tax liability.
Many taxpayers mistakenly believe they no longer need to prepare an estate plan because of the lack of any federal estate tax liability. This may be flawed thinking on their part. First, they may have state transfer tax. This is the estate tax assessed by the state in which they live. Many states do not have an exemption amount as large as the federal exemption. For example, Illinois only has a $4 million exemption for 2013.
The second reason to remain concerned about estate planning is that Congress may change the rules at any time. Beginning in 2019, the President's 2014 budget would return FET to 2009 levels. This would mean a $3.5 million exemption and a top tax rate of 45%.