My record for accurately predicting the future remains abysmal, as I was confident that Congress would not work out the “fiscal cliff” and the accompanying “Taxmageddon” by year’s end (for the record I thought a deal was forthcoming, but expected our lawmakers to play “chicken” a little while longer).
How does the “fiscal cliff” deal impact your estate and estate plan(ning)? Not much as it turns out. Basically – with some small but important caveats – Congress simply made permanent the system that has been in effect for the past two years.
So, instead of the estate tax exemption amount reverting to $1,000,000 per person, the exemption amount remains at $5,000,000 per person (actually $5.12 million in 2012 adjusted for inflation). And instead of the estate tax rate increasing to 55% for most estates, the only thing Congress actually changed is the gift- and estate-tax rate, which increased to a top rate of 40% from a maximum of 35%.
Of potentially greater significance, Congress has made permanent the portability of the unused portion of a spouse’s exclusion. “Portability” is the ability of a widow or widower to add any unused exclusion of the spouse who died most recently to their own. This enables a married couple to transfer up to $10.24 million tax-free ($5.12 million for each spouse).
A caveat – the unused portion of the deceased spouse’s exclusion does not transfer automatically to the surviving spouse. The unused exclusion must be transferred to the surviving spouse by the Executor of the estate of the deceased spouse. In order for this to happen, the deceased spouse’s estate MUST file an estate tax return, even if no tax is due. The estate tax return must be filed nine (9) months after death (this deadline can be extended by six (6) months). If a return is not filed or not-timely filed, the surviving spouse loses the right to portability. It’s a good idea for all surviving spouses to file an estate tax return regardless of their wealth because the value of their estate may increase in the future.
From my perspective as an Estate Planner, the “fiscal cliff” turned out to be a net positive, for the following reasons. First, Congress did relatively little harm (by increasing the top tax rate) and made permanent some important benefits available to married couples (portability). Second, the threat of significant changes in the basic estate and gift tax exclusion caused many people to think about their estates and estate plans (or lack thereof). Nearly 2.5 million Americans die each year, and many have not created even a basic estate plan necessary to protect their loved ones. The New Year is the perfect time to talk to an experienced estate planning attorney about your goals and how to achieve them.