I liken any "permanent" tax laws issued forth from Washington to Lucy holding the football for Charlie Brown. It can be taken away. So it is with estate and gift tax laws.
Oh, by the way, did you hear Congress just made "permanent" changes to the estate and gift tax laws in the shadow of the expiring temporary "tax patch" in place since December of 2010? Okay, color me cynical. Nevertheless, I have helped clients navigate the trecherous tax shoals of (now) five different estate and gift tax changes since I prepared my first estate plan in January of 1985.
Unless you've been living under a rock, you're probably aware that Congress last week passed a tax deal avoiding what the media had termed "the fiscal cliff." You may not be aware, however, of how The American Taxpayer Relief Act impacts your estate, business and retirement planning. Against that backdrop, let's take a look at some key aspects of the Act, starting with a summary of key provisions affecting federal estate and gift taxes.
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 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 the basic exclusion amounts for both spouses 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.
Should you review your estate plan in light of these changes? Perhaps, especially if:
- it has been more than two years since you last reviewed your plan with your estate attorney; or
- 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.
Reference: Forbes (January 2, 2013) "After The Fiscal Cliff Deal: Estate And Gift Tax Explained."