After years and years of changes causing widespread confusion among the population, the federal estate and gift tax codes are finally set into the tax code and will most likely continue this way for the next few years. To be clear, the 11th hour tax law passed by the Senate in December, 2012, has only made permanent the codes that were already in effect since 2010.
This is a great relief to current and potential estate tax payers. Before this, the maximum amount an individual could have been able to exclude from estate taxes was $1 million, and the tax rate that applied to most estates was no less than 55%. Right now, the tax-free amount has gone up to $5.25 million and the top estate-tax rate has dropped to 40%, allowing everyone to breathe relieved.
These changes, coupled with effective estate planning such as wills and trusts, allow most people to avert estate taxes. According to estimates from the Tax Policy Center, only 3,800 estates were expected to owe any amount of federal estate tax in 2013. Here are the most important considerations about the federal estate and gift tax after the fiscal cliff deal:
The Estate Tax Exemption
On January, 01, 2013, the estate tax exemption was scheduled to drop to only $1 million per person – change that would have subjected even middle-class families to the estate tax. The American Taxpayer Relief Act of 2012 did not change tax exemptions, allowing individuals to exclude $5.12 million and married couples up to $10.24 million. Furthermore, the tax rate for amounts transferred over the exemption decreases to 40% from the estimated 55% or even 60%.
Also, the exemption remains portable between spouses, allowing the surviving spouse to use the tax exemption of the deceased spouse without having to rely to additional estate planning documents.
The new law doesn’t change the unlimited deduction from estate tax that allows a surviving spouse to postpone the taxes on assets inherited from each other until he/she dies. This provision, however, applies only if the surviving spouse is a citizen of the United States.
Currently, the unified tax credit – which is expressed as the total amount of gift tax exclusion and estate tax exclusion – is set at $5.25 million per person, and it can be used to lessen or completely eliminate the financial liability for the transfer of assets. If this limit is exceeded, the estate owner or his heirs will have to pay the 40% tax rate. The unified credit is a lifetime value, meaning that if you use a certain portion of the exclusion to make taxable gifts during your lifetime, that amount will be excluded from the total exemption left when you die.
Contrary to the general opinion, estate planning remains relevant even in this context that situates most American citizens under the $5 million exemption amount. The reasons why an individual would still need to contact an estate planning lawyer include asset protection, setting up trusts, planning for business succession, setting up spendthrift and QTIP trusts to ensure beneficiaries will utilize the wealth properly, and many others. Contact Mr. Wintter at Wintter& Associates, P.A. at 954-920-7014, fax 954-920-7080, or send an e-mail to email@example.com and talk about your estate planning needs.
About the Author:
Christopher Q. Wintter is the founder of Wintter & Associates, P.A. and a board-certified expert in Trust and Estate matters by the Florida Bar. With more than 24 years’ experience as a practicing attorney, he also serves as an instructor and faculty member for the National Institute of Trial Advocacy (NITA)—the nation’s leading provider of legal advocacy skills training to practicing attorneys—and has earned the AV® Preeminent™ rating with LexisNexis Martindale Hubbell. He was also selected for inclusion in Florida Super Lawyers for 2011 and 2012 in Estate and Trust Litigation.