Estate Planning After the Fiscal Cliff

Attorney Andrew H. Schwartz explains some of the effects of the "fiscal cliff" legislation on estate and gift taxes and discusses why planning is still very important for most people.


After all of the concern and even panic at the end of last year, and all of the posturing and brinksmanship between Congressional Democrats and the Obama Administration on one side, and Congressional Republicans on the other, compromise was finally reached right after New Year's Day when Conress enacted the American Taxpayer Relief Act of 2012 (“ATRA 2012”), a law that was reported to save us all from the so-called “fiscal cliff.” I have been asked many times how this will impact estate planning, particularly with respect to estate and gift taxes.  The most important impact the legislation has on estate and gift taxes is that it makes the system that was in place over the past couple of years permanent.

Basically, there weren’t many changes made in the new legislation.  In fact, most of the previous laws were simply made permanent.  Below, I will attempt to summarize and simplify the landscape in the post-Fiscal Cliff era and describe how it may affect you.

1. The changes are “permanent” (until further notice, in which case, of course, they're not).

One of the biggest fears at the end of 2012 surrounding the “fiscal cliff” was that if no action was taken, estate tax laws would revert to the way they were before 2001, when Congress enacted the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”).  In EGTRRA, the changes to the federal estate and gift tax laws were temporary since part of the compromise between the parties was that EGTRRA would only be temporary.  The changes that EGTRRA made to tax laws were scheduled to expire at the end of 2010 but were extended (with changes) through 2012.  If the EGTRAA and the 2010 changes were allowed to expire this year, estate and gift tax laws, along with many other federal tax laws would have reverted to pre-2001 levels and the amount that an individual would have been able to pass without estate taxes would have decreased from the level of $5.12 million in 2012 to $1 million in 2013.  Also, the top tax rate would have increased from 35% to 55%.  This would obviously have impacted a great many people and would have rendered useless a great deal of estate planning that people had in place. 

There was also some concern that even if a compromise deal between the Obama Administration and Congressional Republicans was reached, the estate tax threshold would still be lower than at 2012 levels. (A popular opinion was that it would settle at $3.5 million).  However, we do not need to worry about that any longer. 

Had Congress failed to act, the amount an individual would have been able to pass tax free in 2013 would have decreased to $1.0 million - it was $5.12 million in 2012 - and the highest tax rate would have increased from 35 percent to 55 percent. This potential change led to many high net worth individuals to gift significant assets in 2012 to take advantage of the $5.12 million estate and gift tax exemption.

Under the American Taxpayer Relief Act of 2012, the changes are permanent.  Of course, an important caveat is that a future act of Congress could always change the law.

2.  There are no changes in the basic exemption amount for individuals.

ATRA 2012 does not change the Federal estate and gift tax exemption. The base amount is $5 million for individuals but, just as before, this amount will be adjusted for inflation each year.  For persons dying in 2012 the basic exemption was $5.12 million.  For 2013, it is expected to be $5.25 million.  This means that an individual can transfer at least $5.25 million tax-free, either by gift during the person’s lifetime or following their death by will, trust or intestate succession.  For example, if an individual gifts $4.0 million during his lifetime and dies in 2013 with an estate worth $1.25 million, the estate will not owe any Federal estate or gift taxes.

3.  The maximum tax rate is 40 percent.

The maximum estate tax rate has been increased from 35 percent to 40 percent for estates over $5 million.   Although this is still high, it’s better than the alternative, which could have been as high as 55%.

4.  For married couples, there is no increase in the basic exemption amount and the concept of “portability” has been made permanent.

Just as in 2012, married couples can exempt $10 million from federal estate and gift taxes, adjusted for inflation. Therefore, if both spouses die in 2013, the combined exemption would be $10.5 million.

In extending the 2010 estate and gift tax laws, Congress also included the “portability” language contained in the 2010 changes to EGTRRA.  This means that if one spouse passes away and his/her estate is less than the basic exemption amount, the remaining portion of the exemption is “portable”, that is, it can pass to the surviving spouse.  For example, Wilma Flintstone passes away in March, 2013 and her estate is worth $3 million. The remaining $2.25 million of Wilma’s exemption can be used by her husband, Fred, in making lifetime gifts or by his estate when he passes away. If Fred passes away in September, 2013 and he has an $6 million estate, his estate still wouldn’t owe any Federal estate taxes since the exemption increased from $5.25 million to $7.5 million (Fred’s own exemption plus Wilma’s unused portion). 

However, there’s a potential catch:  In order to use portability, the estate of the wife must file a federal estate tax return even though no estate taxes are owed.  This estate tax returns must be filed within 9 months following the date of death, although a 6 month extension can be requested, effectively making the outside filing date 15 months from the date of death.  The person filing the return (the Personal Representative of the Estate) must specifically elect portability on the return.  The filed return will then be used to determine the amount of Wilma’s exemption able to be transferred to Fred.  If Wilma’s Personal Representative fails to file a return in a timely manner, the opportunity to use portability will be lost.

5.  There are also no changes to annual gift tax exclusion amounts.

For 2013, individuals can gift up to $14,000 per year, per person, free of gift tax and without dipping into the $5 million lifetime exemption.  This gift tax exclusion has typically increased by $1,000 per year.

Married couples can gift up to $28,000.00 per year, free of gift tax, and without dipping into the Federal estate tax exemption.

6. Married couples can still make unlimited gifts to each other.

Married persons can continue to gift/transfer property to each other without utilizing the annual or lifetime gift tax exclusion amounts.  For a number of reasons, this can be beneficial if one spouse has significantly more assets in his/her name than the other. 

7.  State law did not change.

With all the attention paid to what was going on in Washington D.C., it was easy to forget that Massachusetts has not made any similar changes to its estate tax laws.  Massachusetts’ estate tax still applies to estates with an adjusted value over $1 million, and there is no portability.  The highest estate tax rate is 16.0 percent of the taxable amount (adjusted value minus deductions and credits). 

8.  Even modest estates still need planning.

Even though it seems that we have avoided the danger of the fiscal cliff in the areas of estate tax and gift taxes, you still should not avoid or delay handling your estate planning.  As a result of the provisions of ATRA 2012, most people do not have estates that will be subject to the Federal estate tax.  Some people will be subject to the Massachusetts estate tax, although clearly still many will not.  However, even if you have a more modest estate worth less than the taxable amount, you probably still need some planning due to factors such as family dynamics, individual beneficiary needs (i.e. individuals with disabilities or that are irresponsible or immature), or even your own future financial and/or medical needs.

With proper planning during your lifetime, you can ensure that your money and assets are used to benefit the people that you would prefer.  You will avoid having a court decide for you or worse, having your hard-earned money and property be used up in needless litigation.  Now more than ever, it is important to speak to an attorney to make sure that your estate plan is the way it should be.

Andy Schwartz is an attorney concentrating in estate planning, elder law, special needs planning and real estate law. He is a member of the National Academy of Elder Law Attorneys and the Real Estate Bar Association of Massachusetts.  He can be reached at schwartz@brocktonlaw.com or at (508) 587-6000 with questions or comments, or check out his website at www.brocktonlaw.com.

The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact Attorney Schwartz or another attorney directly.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.


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