Fiscal Cliff Averted - Good News/Bad News

In January, the Congress finally resolved the fiscal cliff—temporarily—by passing the “American Taxpayer Relief Act”.  That’s the Good News.  The Bad News is that this is a temporary situation in many ways and we could/will see some changes in the future.

    At this point, we can consider the following as the result of the passage of H.R. 8:

    The Act makes permanent all of the provisions of TRA 2010 except the rate which increases.  The value of assets excluded of $5 million, adjusted for inflation, is extended, and therefore, for 2013, the exclusion is $5.25 million.  This exclusion may be used at death or during lifetime, with any lifetime use subtracted from the amount remaining at death.  The tax rate is increased and capped at 40% rather than the 35% which has been in existence in the prior law. 

    The Good News is that the “portability” provision is retained, allowing the unused exclusion amount of the first spouse to die to be used by the surviving spouse.  NOTE:   The Estate Tax Return must be filed for the pre-deceasing spouse.  This is a positive continuation of the portability that has been in existence since 2010, and will allow clients to take advantage of the possibility of allowing an estate in excess of $10 million to exist without estate tax.         

    Many attorneys have recently used the simplification of drawing wills which convey all assets to the surviving spouse (anticipating that the marital deduction will bring about the portability of over $5 million from the spouse that predeceases); however, many attorneys prefer the alternate means of preserving the exclusion by use of a credit shelter trust.  Many lawyers are convinced that this is the better way to continue to receive the maximum credit available, and, in addition, the use of a credit shelter trust provides protection should there be a subsequent marriage.  The Good News is that you still have this choice.        

    The Bad News is that there are many issues still remaining to be faced by Congress.  Much has been made of the delay of the two parties to resolve the remaining issues.  It may be that the Congress will tweak some of the Act when it reviews the necessary legislation to consider the cuts which have been temporarily delayed.          

    Again, it should be emphasized that the first spouse to die must file an estate tax return in order for the surviving spouse to take advantage of much of the new law.           

    The Bad News is that nothing is certain as far as this Congress is concerned.

jeanie Clemmer