The Fiscal Cliff, the Estate Tax, and You

In July we posted about the major changes coming to the estate tax if Congress takes no action before the end of the year.  With only two weeks left in 2012, Congress has still not done anything to avoid the so-called “fiscal cliff.”

The fiscal cliff refers to a multitude of tax breaks all expiring at the beginning of 2013.  It also refers to automatic spending cuts that may be triggered.  Capital gain and income tax rates are set to increase.  However, one tax, which is set to change dramatically, is not getting much attention, but is critical for estate planning:  the estate tax (sometimes called the death tax or known as an inheritance tax).

Currently, the estate tax credit is $5.12 million per person.  There’s also a “portability” provision that effectively allows a married couple to double this exemption to $10.24 million.  At these levels, the vast majority of our clients can avoid estate tax issues and estate tax problems.

However, unless Congress passes a law stating otherwise, in 2013 estates worth $1 million and up will be subject to the estate tax.  In the event that no action is taken, and no new law is enacted, the exemption will drop to $1 million per individual, and the portability provisions of the estate tax will not exist.  At the new level of $1 million and without portability, there are a great number of people who need to review their current documents and planning to ensure the most tax advantageous plan.

Additionally, the top estate tax rate will go up to 55%!  This is not an error or typo – the top rate really is 55%.

While $1 million may sound like a lot of money, your estate for estate tax purposes, called the “gross estate,” includes your home, rental property, farming property and equipment, retirement accounts, life insurance, bank accounts, and everything else you own.  If you own your own business, it’s also included in your gross estate.  It does not matter if this property passes to your heirs by Will, Trust, beneficiary designation, through probate or avoiding probate.  By dropping the exemption from $5.12 million to $1 million, many people will be affected by the estate tax and will need a tax advantaged plan.

If you would like to discuss the estate tax in further detail and how you can limit the taxes on your own estate, contact our office.  We can help you protect your assets.