Now that the fiscal cliff has been averted — at least temporarily – there is widespread confusion about the effect on estate planning of the 11th hour tax law passed by the Senate on New Year’s Eve, and by the House of Representatives one day later.
Remember all that hype over the impending “fiscal cliff” of 2013? Well, we all lucked out …Congress did indeed prevent the financial plunge into an estate tax disaster. However, you may not be aware of how The American Taxpayer Relief Act impacts your estate, business and retirement planning.
Perhaps one of the most important aspects of these new provisions is that they are permanent (as “permanent” as anything in Congress can be, anyway). By “permanent,” I mean that there is no scheduled “sunset” or repeal. For the first time in more than a decade, we now have a set of laws around which we can make reasonable estate and gift tax plans.
Deborah Jacobs of Forbes wrote a succinct summary in the article, “After The Fiscal Cliff Deal: Estate And Gift Tax Explained.” You may want to click over to read it, but here are the highlights:
- The Basic Exclusion Amount is set at $5.12 million per person in 2012, to be adjusted annually for inflation. In plain English, this means that a single person may transfer up to $5.12 million in estate value to their heirs federal estate tax-free.
- There is an unlimited marital deduction, which means spouses can pass unlimited estate value from one to another without federal estate taxation.
- Your basic exclusion amount also is “portable” to your spouse, which means that a surviving spouse can apply both spouses’ basic exclusion amount to protect up to $10.24 million in estate value from federal estate taxation. As Jacobs notes in her article, however: “Still, portability is not automatic. The executor handling the estate of the spouse who died will need to transfer the unused exclusion to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing an estate tax return when the first spouse dies, even if no tax is owed.”
- Lifetime gifts are subject to the same $5.12 million basic exclusion amount, as part of your unified credit (one credit of $5.12 million for estate transfer and gifts made during your lifetime). Again, spouses may utilize both their mutual basic exclusion amounts to make lifetime gifts (called gift-splitting). Remember that lifetime gifts will reduce the exclusion amount available to the final estate.
- The annual exclusion ($14,000 per person) allows you to make lifetime gifts that don’t count against your estate and gift tax basic exclusion. Married couples can combine their annual exclusion amounts to make gifts of up to $28,000 per person per year. For example, a married couple with two adult children could gift each child $28,000 per year, for a total of $56,000 – without utilizing their lifetime estate and gift tax basic exclusion.
Is it time for a review of your estate plan? Possibly, especially if it has been more than two years since you last reviewed your plan with your estate attorney. Other reasons to review your plan would be if you have experienced significant life changes such as marriage or remarriage, the serious illness of a spouse or other family member, the birth or adoption of a child or grandchild, acquisition of property in another state, or a significant change in your finances such as receiving an inheritance or selling a business. If you have questions about how the new laws might change your estate planning, call the office to schedule an estate plan review.
For more information about the gift tax in Fullerton, CA, please visit my estate planning website.
Reference: Forbes (January 2, 2013) “After The Fiscal Cliff Deal: Estate And Gift Tax Explained.”