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, ATRA 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 $5,000,000 indexed basic exclusion amount and the deceased spousal unused exclusion amount. The latter provisions are sometimes referred to as the portability rules because, in effect, they allow one spouse's estate tax exclusion to be passed to the other spouse. ATRA also introduced a new maximum transfer tax rate of 40%. Thus, the main transfer tax emphasis of the actions taken by Congress in ATRA was to stabilize the wealth transfer tax system while also permanently establishing a significant new planning tool, the deceased spousal unused exclusion amount. In this Article, we explain the operation of the federal wealth transfer taxes (the estate tax, the gift tax, and the generation skipping transfer tax) in the wake of ATRA and dissect the basic tax planning techniques for wealth transmission. In doing so, we offer a thorough analysis of the operation of the portability rules and explain their planning virtues and drawbacks. The overall design of this Article is to bring the reader into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.
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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, ATRA 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 $5,000,000 indexed basic exclusion amount and the deceased spousal unused exclusion amount. The latter provisions are sometimes referred to as the portability rules because, in effect, they allow one spouse's estate tax exclusion to be passed to the other spouse. ATRA also introduced a new maximum transfer tax rate of 40%. Thus, the main transfer tax emphasis of the actions taken by Congress in ATRA was to stabilize the wealth transfer tax system while also permanently establishing a significant new planning tool, the deceased spousal unused exclusion amount. In this Article, we explain the operation of the federal wealth transfer taxes (the estate tax, the gift tax, and the generation skipping transfer tax) in the wake of ATRA and dissect the basic tax planning techniques for wealth transmission. In doing so, we offer a thorough analysis of the operation of the portability rules and explain their planning virtues and drawbacks. The overall design of this Article is to bring the reader into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.