The Fiscal Cliff and Your Estate Planning (Part II): Proposed Laws

November 27, 2012
300px Dallin Oaks The Fiscal Cliff and Your Estate Planning (Part II): Proposed Laws

How will President Obama and Congress handle the impending fiscal cliff? (Photo credit: Wikipedia)

In Part I of this topic, we explained the fiscal cliff and how it will likely result in changes in estate and gift tax law that could affect millions of families in the coming years.  In this post, we discuss each of the main proposals regarding these taxes that seem to be under the most serious consideration in Congress.

But first, let’s take a brief look at what we’re even talking about.

Brief Review of Estate and Gift Taxes

Whenever wealth is shifted from one individual to another, the transfer is subject to gift tax (if the donor is alive) or estate tax (if the donor is deceased).  All U.S. citizens, as well as certain non-U.S. citizens, are subject to this rule.

However, under current law, only about 2 out of every 1,000 (0.2%) people give large enough transfers for these taxes to even apply.  This is because every individual’s first $5.12 million is exempt from these transfer taxes, whether it occurs during life or after death.  We’ll refer to this as the “lifetime exemption”.

If you’re one of the lucky individuals giving away over this $5.12 million (either by gift or as a result of your death), then any amounts exceeding this exempt amount trigger the aforementioned taxes, which maximize at 35% of the excess.  We’ll refer to this as the “maximum rate”.

Two quick back-of-the envelope examples:

  • Example 1:  Scrooge has decided to change his miserly ways and give a gift for the first time in his life.  On Christmas Day 2012, he gives Bob Cratchit a $6.12 million check.
    • The first $5.12 million of Scrooge’s assets are exempt from gift tax, so only $1 million of the gift is taxable.  Under a maximum 35% gift tax rate, Scrooge would owe the IRS approximately $350,000 in gift taxes.
    • By the way, Cratchit wouldn’t owe any gift tax (the donor is responsible) or income tax (gifts received are not taxable as income).
  • Example 2:  George dies in 2012 with $6.12 million.  He never made a large enough gift during his lifetime to incur any gift tax.  In his will, he leaves the entire amount to his friend Tom.
    • Similarly, George’s first $5.12 million is exempt from estate tax.  The remaining $1 million is taxable, and George’s estate would owe the IRS approximately $350,000 in estate taxes before its transfer to Tom.

By the way, since the estate and gift taxes currently have the exact same rates, the two systems are said to be “unified”.  As we’ll see below, this doesn’t necessarily have to be the case.

Proposed Estate and Gift Tax Legislation

The key differences in the proposals discussed below involve the two numbers discussed above – the lifetime exemption and the maximum rate (with one exception that will be noted below).  Therefore, we will use these two numbers to distinguish the proposals from one another in our analysis below.

Doing Nothing:  $1 Million Lifetime Exemption / 55% Maximum Rate

If Congress and the President do not compromise by this December 31st, these rates will automatically result.  As we discussed in Part I, this result would be part of the status quo solution, which many fear would lead us rapidly into a recession in 2013.

It is highly unlikely that this would be the permanent solution.  If we begin 2013 without a compromise, it is expected that one of the options listed below would eventually become law, but not without a fight.  There is recent precedent for this result; Congress already avoided compromise on estate and gift taxes in late 2009, and this resulted in no estate tax in 2010.

President Obama’s Proposal:  $3.5 Million Lifetime Exemption / 45% Maximum Rate

This solution is probably the favorite at this time, but there are two versions to pay attention to.

President Obama’s preferred version provides the exception warned about above because he wishes to split apart the estate tax lifetime exemption (down to $3.5 million) and the gift tax lifetime exemption (down to $1 million).  The main rationale for such a split is that under a current loophole (as described here), the law strongly favors lifetime gifting over waiting until transfers after death.  Many believe that Obama’s re-election was a mandate to close loopholes like this that save taxes for the rich.

The other version maintains the unification of the estate and gift tax with both using a $3.5 million lifetime exemption.  This was the law in 2009 and was introduced in the Senate as an option earlier this year.

Current Law:  $5.0 Million Lifetime Exemption / 35% Maximum Rate

This option would represent a continuation of the law in place in 2011 and 2012.

This result seems unlikely but some believe that this may remain in place to help protect farmers, ranchers or others with non-liquid businesses (if a family’s wealth is mostly non-liquid (e.g., land), where do they get the cash to pay for a huge estate tax bill).

Also, if Republicans deem the estate and gift tax important enough, then this choice may result if they make significant concessions elsewhere.

Note that the $5.0 million figure would change each year to coincide with inflation.  For instance, the lifetime exemption rose from $5 million in 2011 to the current $5.12 million in 2012.

Estate and Gift Tax Repeal

There are still those out there who hold out hope that repeal of the whole thing is still a potential option.  However, a Republican sweep of the recent election would probably have been necessary for repeal to occur this soon, if ever.


In Part III of this series, we will take a look at the actual impact that these proposals would have on you as well as towards our fiscal cliff problem.

 The Fiscal Cliff and Your Estate Planning (Part II): Proposed Laws
 The Fiscal Cliff and Your Estate Planning (Part II): Proposed Laws


Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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5 Responses to The Fiscal Cliff and Your Estate Planning (Part II): Proposed Laws

  1. November 27, 2012 at 7:39 pm

    In your do nothing section you commented that “this resulted in no estate tax in 2010″. Am I understanding correctly that in 2010 no one had to pay estate tax? It seems that would create quite the disparity in the federal government’s coffers.
    Krysteena recently posted..Cyber Monday Deals | Plant City Photographer

    • November 27, 2012 at 7:41 pm

      …seems 2010 would have been the optimal year to die if that’s the case.
      Krysteena recently posted..Cyber Monday Deals | Plant City Photographer

      • Scott
        December 3, 2012 at 5:39 pm


        It took Congress until nearly the end of 2010 to decide on how to handle estate and gift taxes for those who died in 2010. Eventually, the folks handling those estates could choose from two options: They could either 1) use the then new $5 million lifetime exemption or 2) they could instead elect to have no estate tax, but then their beneficiaries would not be able to avoid capital gains taxes on any of their investment gains. George Steinbrenner was one prominent billionaire that died that year.

        Take care,

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