Estate and Gift Tax rules

As everyone knows so well, late in the evening on January 1, a compromise was reached resulting in new legislation euphemistically titled the “American Taxpayer Relief Act.”  The new law avoids some of our worst fears.

The federal estate and gift tax exemption did not revert to $1,000,000, as would have occurred in the absence of action.

As to the federal estate tax, there is an exemption of $5,000,000, adjusted for inflation.  This means that for 2013, the exemption is $5,250,000.  The combined exemption amount for a husband and wife is $10,500,000.  This is “unified” with the gift tax and may be used at death or during lifetime.  Lifetime use is subtracted from the amount remaining for use at death.

It is very helpful that the gift tax and estate tax exemption are the same amount.  Congress did not implement President Obama’s original proposal to have a gift tax exemption lower than the estate tax exemption.

“Portability” is also retained by the new law.  This means that any unused exemption amount of the first spouse to die may be used by the surviving spouse, if an estate tax return is filed for the spouse who dies first.  This also means that a trust is not required to be established by the spouse who dies first in order to use the combined exemption amount.

The generation skipping tax exemption is also set at the same amount as the estate and gift tax exemption.  As the name implies, the generation skipping tax is designed to prevent individuals from avoiding estate taxes by holding property in trust for several generations.  As with prior law, the generation skipping tax exemption is not portable.  This means that if estate planning includes use of the generation skipping tax exemption, in order to preserve the generation skipping tax exemption of the first spouse to die, the use of a credit shelter trust is needed.  A trust established by the first to die might also be desired for other reasons, such as ensuring that assets pass to children and are not obtained by another spouse through remarriage or by creditors of the surviving spouse.

It is also helpful that the new law did not implement various Obama proposals, such as eliminating 2-year GRATs.  A GRAT is a Grantor Retained Annuity Trust – often used by taxpayers to pass the benefit of asset appreciation to descendants without using the estate and gift tax exemption amount.  The Obama administration had wished to limit the benefit of this estate planning technique by requiring a minimum term for GRATs.

An unfavorable change is that the federal estate tax rate that applies to amounts above the exemption now rises to 40% instead of the previous 35%.

The new law again allows individuals over age 70-1/2 to give up to $100,000 from an IRA to a charity, without taking the amount into income.  This is often important because charitable deductions are capped or otherwise limited depending on the individual’s circumstances.

Bottom line: Individuals should review their estate plans with their estate planning legal counsel to determine whether any changes are appropriate as a result of the new law.  In cases where total assets are below the combined exemption amount, consideration might be given to eliminating trusts previously incorporated in wills to ensure use of the combined spouse exemption amounts.  In deciding whether to make gifts to children or grandchildren, consideration should be given to the federal estate tax – and also estate or inheritance taxes imposed by Pennsylvania or other states where properties are owned or the individual resides.

We hope you find this issue of KKAL’s Business Law Watch helpful and informative.  Please understand that the Law Watch is designed to provide information about current developments and required actions.  It does not constitute legal advice, and businesses and their owners should consult a lawyer knowledgeable in this area of the law prior to taking specific actions on the issues addressed.

If you have any questions regarding any business law matter, including the issues discussed in this newsletter, please do not hesitate to contact us at 717-392-1100, or email us at the following addresses:



Business Law Group

(717) 392-1100

Charles F. Blumenstock, Jr.

Rhonda F. Lord                              

Jason T. Confair                        

Anita Henkel Blumenstock

Clarence C. Kegel, Jr.                   

Kegel Kelin Almy & Lord LLP has a substantial business law practice, representing businesses of all sizes.

Kegel Kelin Almy & Lord LLP advises businesses on mergers and acquisitions, business formation, general contracting and business counseling, financing, distribution and trade regulation, tax, technology law issues, environmental issues, as well as a full range of other legal areas faced by businesses.

© 2013 Kegel Kelin Almy & Lord LLP.  All Rights Reserved.

This publication is designed to provide general information on the topics presented.  If legal or other professional advice is required, the services of a professional should be sought.