Estate tax changes: Catching up on the ‘fiscal cliff’ deal

The headlines were filled in the first days of 2013 with news of the deal between Democrats and Republicans to avert the so-called fiscal cliff. Part of the deal, as you undoubtedly know, was an agreement that estate taxes are to rise.

The first $5.12 million of a person’s estate is still exempt from taxation, but the rest can be subject to a tax rate of 40 percent (up from 35 percent).

The American Taxpayer Relief Act of 2012 includes a provision that makes permanent the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and sets the estate tax rate at 40 percent, effective on the first day of this year.

The $5 million exemption has been indexed for inflation and is effectively $5.12 million ($10.24 million for married couples). You might recall that the exemption was scheduled to drop to just $1 million per individual this year, but the “fiscal cliff” deal avoided that change.

The deal also lowered the scheduled increase in taxation of estates exceeding the exemption. Those taxes had been scheduled to go to up to 60 percent in some cases, with the majority between 35 percent and 55 percent.

Also, the estate tax exemption continues to be portable, so a surviving spouse can make use of an unused federal estate tax exemption in the decedent spouse’s estate.

That means that for some people, the need for a trust may well be reduced.

That doesn’t mean bypass trusts are no longer needed, however. Some people will use them to protect an estate from creditors, or where assets might gain in value or because trusts can be useful to a surviving spouse who gets remarried, among other reasons.

To learn more about changes in estate taxes, discuss your unique situation with an experienced estate planning attorney.

Source: Forbes, “More Estate Tax Changes Could Follow Fiscal Cliff Deal,” Jan. 6, 2013

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