Only Small Change to Estate Tax from "Fiscal Cliff" Compromises

All of the talk in recent months about our nation’s economy and what our government planned to do about this “fiscal cliff,” decisions have been made and now we are left wondering what to make of it all. Most of us, in particular, are wondering what this will be doing to our families and ourselves, not just the country at large.

So far, people have been seeing larger numbers taken out of their paychecks due to the increase of taxes, and a couple other things are bound to change with families and small businesses, but we are happy to note that as part of the tax compromise that was approved, the amount that is exempted from estate taxes will remain the same as it has been for the past two years, although the maximum tax rate will rise by 5 percentage points. Those of us who are seeing an increase in money taken out of our paychecks will have solace knowing that estate tax will not be changed as a result of this deal.

The American Taxpayer Relief Act (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf), which passed in the House by a vote of 257/167, permanently sets the estate tax exemption at $5 million for an individual and $10 million for a couple. Taking into account the new adjustments to inflation, these exemptions are estimated to rise to about $5.2 million for an individual and $10.24 million for couples. The gift tax and generation-skipping transfer tax exemptions will also remain the same as last year, adjusting for inflation, and the estate tax portability provision remains intact.

Although this is good news for most of us without assets in the millions, for those that exceed these amounts, Congress did change one of the prior rules: the maximum tax rate on inheritances above these levels will increase from 35 percent to 40 percent.

Although the bill's provisions should have taken effect on the first of the year when President Obama had promised to sign it into law, technically for now the estate tax has reverted to its 2001 level of a 55 percent tax on inheritances above $1 million.

Also the annual gift tax exemption has been raised to from $13,000 to $14,000 gift per year per person. However, a person can gift more than this amount each year by declaring a larger gift as part of their lifetime estate gift tax exemption (which is set at $5 million with inflation adjustments in the future) by declaring it on a 709 Gift Tax Return.

For more information about this and other California asset protection or estate planning questions, call LA LAW Center, LLP for a complementary consultation at 1.877.537.8283.