Impact of the American Taxpayer Relief Act (“ATRA”)


Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA):
Beginning in 2002, estate taxes are being phased out over nine years. Specifically, if someone dies in 2010 there will be no estate tax due on the estate. The following year the act will expire (“sunset”) and estate taxes, along with the highest levels of exemption, will be reinstated to the 2001 rate.

The abolishment or annulling of a previously existing law by the enactment of a subsequent statute which declares the former law shall be revoked or no longer in effect.

Sunset Provision:
A provision of a law that provides that, unless steps are taken to ensure the continued existence of a certain law, it will cease to exist after a certain date.

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“TRA 2010”):

The stop-gap that was signed into law on December 17, 2010, extending the reprieve from 2001 Estate Tax rules with a top rate of 35% and an exemption amount of $5,000,000. This law was only good for two years and was supposed to sunset on December 31, 2012, meaning that on January 1, 2013, the federal generation skipping transfer tax exemption and rate were supposed to default to the numbers that were in effect in 2001/2002.

American Taxpayer Relief Act (“ATRA”):

Signed into law January 2, 2013, which has led to the permanent extension of the laws governing estate taxes, gift taxes and generation skipping transfer taxes that were put in place by TRA 2010 with one notable exception - the top estate tax, gift tax and generation skipping transfer tax rate under TRA 2010 was 35%, but ATRA increases the top rate to 40%. TRA 2010 unified the estate tax, gift tax and generation skipping transfer tax exemptions and also provided for inflation indexing of these exemptions beginning in 2012, so over the years the exemptions will gradually increase above the $5 million exemption put in place by TRA 2010.

As 2010 approached, estate planners watched with bated breath to see what Congress would do: would there really be no estate tax in 2010? Would Congress allow the exemptions to again drop to 1,000,000 per person with a top rate of 55%? At those exemption amounts, many more people would be caught in the net of the estate tax - not just the wealthy. Taxpayers scrambled to plan at the end of 2010 in preparation for the 2001 rates.

The moral of the story is that the Estate Tax system is constantly changing. Estate planners need to follow rule changes vigilantly in order to assist and guide their clients.