The Fundamentals of Wealth Transfer Tax Planning: 2013 and Beyond

Abstract

On January 1, 2013 Congress avoided the tax part of the so called “fiscal cliff” when it passed the American Taxpayer Relief Act of 2012 (ATRA). Among its many impacts this law prevented the application of a number of sunset provisions that would have dramatically altered the operation of the federal wealth transfer taxes. Instead Congress made permanent two significant transfer tax provisions introduced as temporary measures in 2010: the indexed basic exclusion amount and the deceased spousal unused exclusion amount. The latter provisions are sometimes referred to as the portability rules. ATRA also introduced a new maximum transfer tax rate of 40%. In addition ATRA made permanent a deduction for state death taxes and prevented the return of the state death tax credit. Thus, the main transfer tax emphasis of the actions taken by Congress in ATRA was to stabilize the wealth transfer tax system in a fashion that eliminates or reduces its planning impact on most taxpayers while also permanently establishing a significant new planning tool for the wealthy, the deceased spousal unused exclusion (DSUE) amount. In this article we summarize the operation of the federal wealth transfer taxes in the wake of ATRA and describe the basic tax planning techniques for wealth transmission. In doing so, we offer a thorough analysis of the operation of the portability rules and discuss their planning virtues and drawbacks. The overall design of this article is to bring the general practitioner into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.