The beginning of 2013 brought significant changes to our estate and gift tax laws. A brief summary of the updates in the law is listed below, but if you are considering creating a new estate plan for you and your family you should consult with an attorney to make sure your estate plan works in accordance with these new laws.
In one of my previous blog posts, I mentioned that Congress needed to act in order to avoid the federal estate tax exemption from going down to One Million Dollars ($1,000,000.00) at a 55% tax rate in 2013, and in January of this year Congress did in fact act by passing the American Taxpayer Relief Act, which made the Five Million Dollar ($5,000,000.00) estate tax exemption amount permanent. The $5,000,000.00 exemption is adjusted for inflation, and the inflation-adjusted estate tax exemption amount for 2013 is 5.25 Million Dollars. For estates over 5.25 Million Dollars the maximum estate tax rate was increased by five percent to forty percent in 2013, but this is still fifteen percent less than it would have been if Congress had not acted.
The Act has also made permanent the unlimited marital exemption between spouses. Practically speaking, this means that either spouse may leave any amount to the surviving spouse without incurring the estate tax. The estate tax exemption is also portable between spouses so if the exemption is not exhausted by one spouse then the surviving spouse can add the unused portion of the deceased spouse’s 5.25 Million Dollar exemption amount to his/her own exemption amount. The portability of the exemption amount essentially allows spouses to have a total estate tax exemption amount of 10.5 Million Dollars.
The Act also made the unification of both the estate tax and gift tax exemption permanent, which means that all lifetime gifts made by you will in turn reduce that same amount of dollars from your estate tax exemption amount. However, the lifetime gift exclusion only applies to gifts that are over the annual gift tax exclusion amount, which is currently at $14,000 per person ($28,000 for a married couple). This means that gifts below the annual gift exclusion amount do not incur a gift tax and they also do not reduce your lifetime gift tax exemption amount. You can also give an unlimited amount of people per year the amount under the annual gift tax exclusion. Gifting under the annual gift tax exclusion amount is a good tool for people trying to reduce the size of their estates so that they can qualify for the estate tax exemption.
These are just some of the main changes to estate and gift tax law. Although a lot of these new changes are permanent, you should be aware that Congress always has the power to modify these laws in the future and it is always important to consult with an attorney who specializes in these areas of the law when trying to develop a new estate plan for you and your loved ones.