What is the future of the federal estate tax? All we know for sure is that no one knows anything; it’s all speculation. So, let’s take a look at what could happen.

A quick history lesson

An alphabet soup of tax laws (EGTRRA, JGTRRA, TIPRA, and the others, 13 in total), enacted between 2001 and 2010, created and extended many tax benefits, commonly known as the Bush tax cuts. Provisions affecting estate tax law included a reduction of the top gift, estate, and generation-skipping transfer (GST) tax rates, and an increase in the tax exemptions.

Some of the Bush tax cuts, including the estate tax changes, will “sunset” in 2013. That means they will expire and the tax laws will revert to what they were before 2001, unless Congress extends them again or enacts other legislation.

Current estate tax law

  • The top federal gift and estate tax rate in 2012 is 35%. This top rate is scheduled to increase to 55% with a 5% surcharge on estates that exceed $10 million, but do not exceed $17.184 million.
  • The federal GST tax (this is an additional tax on all property or asset transfers you make during your life and at your death to persons who are two or more generations below you, such as grandchildren and grand nieces) is imposed at a 35% tax rate in 2012. This rate increases to 55% in 2013.
  • Generally, the federal gift and estate tax exemption equivalent amount in 2012 is $5.12 million. This exemption amount decreases to $1 million in 2013.
  • The federal GST tax exemption in 2012 is $5.12 million. This amount will decrease to $1 million, indexed for inflation (estimated so far to be $1.36 million).
  • The federal annual gift tax exclusion is $13,000 in 2012 (this figure will likely increase in future years). Each taxpayer is entitled to this exclusion, so married couples can gift up to $26,000 federal gift tax free. This exclusion applies to an unlimited number of beneficiaries. This exclusion does not sunset; it is permanent.

Portability of exemption in 2011 and 2012 only

The last piece of legislation introduced a new concept: portability of the gift and estate tax exemption. That means the estate of the first spouse to die can transfer to the surviving spouse any portion of the exemption that is not used.


In 2012, Husband has an estate valued at $3 million, and Wife has an estate valued at $9 million. Husband dies in 2012, and believing that Wife was well provided for, leaves his entire estate to the couples’ children. His estate uses $3 million of the available $5.12 million exemption so that his entire estate can be transferred to the children free from federal estate tax. Husband’s estate transfers the $2.12 million exemption amount that is left over ($5.12 million minus $3 million equals $2.12 million) to Wife. Wife now has an exemption amount of $7.24 million ($5.12 million plus $2.12 million equals $7.24 million). Now, say that Wife dies later in 2012. Wife’s estate of $9 million is transferred to her heirs. The $7.24 million passes free from federal estate tax and $1.76 million is subject to federal estate tax. If the exemption had not been portable, Wife’s estate would have passed $5.12 million estate tax free and $3.88 million would have been subject to federal estate tax. An additional $2.12 million passes tax free with portability. This is assuming no other variables, and no other estate tax strategies (such as a credit shelter trust) in place to reduce the tax further.

Portability is effective for the tax years 2011 and 2012 only. It will not be available to estates in 2013 and thereafter, unless Congress extends this provision or enacts other legislation.

What could happen

  • Congress could extend all or some of the current provisions for another set time frame (probably two years), so the estate tax laws explained above would remain in effect (i.e., 35% top tax rate, $5.12 million exemption (plus any adjustment due to inflation), and portability of the federal gift and estate tax exemption).
  • Congress could allow all or some of the provisions that sunset to expire. That means the estate tax laws in effect in 2001 will apply (i.e., 55% top tax rate, $1 million exemption (as indexed for inflation), and no portability).
  • Congress could pass a compromise bill that would put the figures close to the middle, setting the top tax rate at 45% and the exemption amount at $3.5 million. Whether portability will expire or be extended is up in the air.
  • Congress could reform the estate tax laws.
  • Congress could repeal the estate tax altogether.

Investment Advisor Representative: Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor.  Registered Representative: Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC.  Cambridge and Affinity Wealth Advisors Inc. are not affiliated.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012.