Estate Planning Post-Fiscal Cliff

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Estate Planning EssentialsNow that the fiscal cliff has, at least temporarily, been averted, it is important to take note of the estate planning implications that came about as a result. Much of what Congress did with this “deal” was to make permanent the system that has already been in place for the last two years, which was an important achievement. Had Congress not acted on this challenge, the tax-free estate tax limit would have gone back to $1 million per person, and the rate for most estates would have been raised to 55%. Thankfully, though, Congress was able to avert the fiscal cliff, and the only factors that were actually changed are the gift-and estate-tax rate, which now has a top rate of 40%, up slightly from a maximum of 35%.

Here are a few questions and answers on the federal estate tax after the fiscal cliff deal:

1. Who must pay federal estate taxes?
Under the 2010 tax law, you can transfer up to $5 million tax-free, at the time of your death. This figure, the “basic exclusion amount,” is adjusted for inflation. Therefore, in 2012, the amount was raised to $5.12 million, and as of January 11, 2013, the amount was raised to $5.25 million. The new fiscal cliff deal did not affect how much you can pass on tax-free.

2. Do spouses have to pay this tax when they inherit from one another?
In short, no. The new law didn’t change this process either. According to, “There is an unlimited deduction from estate and gift taxes that postpones the tax on assets inherited from spouses until the second spouse dies. This marital deduction, as it is called, applies only if the inheriting spouse is a U.S. citizen.”

3. How much can a surviving spouse pass on tax-free?
This is slightly more complicated. In 2010, the tax law gave married couples a tax break, and the new law made it permanent. Widows and widowers are able to add any unused exclusion of their recently deceased spouse to their own. This allows them to be able to transfer up to $10.24 million tax-free this year.

One thing to note is that portability is not automatic – the executor handling the estate of the now-deceased spouse has to transfer the unused exclusion to the survivor. The survivor can then use the funds to prepare lifetime gifts or pass assets through his or her estate. The prerequisite to this portability is that the surviving spouse or executor must file an estate tax return when their spouse dies, even if no taxes are owed. This return is due 9 months after death, and there is a 6-month extension when necessary. However, if the return isn’t filed or the deadline isn’t met, the spouse loses the right to portability.

4. How does all of this relate to lifetime gifts?
The lifetime gift tax exclusion and the estate tax exclusion are combined for the total $5.25 million per person. It is possible to use this exclusion, sometimes called the “unified credit,” to transfer assets at either stage, or at a combination of the two. However, if you exceed the limit, you (or your heirs) will owe taxes up to 40% in taxes.

You are expected to tally up and report to the IRS any gifts you have given throughout your life, so that when you pass away, the agency knows how much you have used, and can figure out the unused exclusion to be passed on.

Married couples get a special tax break, in that they can share the basic exclusion during life (gift-splitting), to give more to their beneficiaries now, tax-free. But, this will reduce how much of what they pass on at death will be tax-free.

5. Are there any lifetime gifts that don’t count?
Yes! Individuals can give up to $14,000 per year per person without it counting against the $5.25 million lifetime exemption. Spouses can also combine these annual exclusions to double the size of the gift. Forbes outlines the following example: “For example this year, relying on the annual exclusion, a married couple with a child who is married and has two children could make a joint cash gift of $28,000 to the adult child, the child’s spouse and each grandchild – four people – providing the family with $112,000 a year. Only gifts that exceed the limit count against the lifetime exclusion.”

6. Should you redo your estate plan because of the new laws?
It’s always a good idea to have your estate plan reviewed annually to ensure it’s still up to date with current laws as well as your wishes. If you’ve had any significant changes to your finances or personal life, it may be a good idea to talk to your estate-planning attorney to be sure everything is up-to-date. As always, we are here for you if you have any questions regarding anything covered in this weeks article.


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