Mostly what Congress did in this arena was to make permanent the (estate tax) system
that has been in effect for the past two years.

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. This week I’ll focus on those 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 that 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 both spouses’ basic exclusion amount 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. If any of these situations apply to you, or if you have questions about how the new laws might change your estate planning, call the office and ask to schedule an estate plan review consultation.

For more information on estate planning, please visit my estate planning website.

Do You Need To Speak With An Attorney About Estate Planning?

If you need to speak with an experienced estate planning lawyer please contact us online or call us directly at 800.756.5596 to first register for one of our free, informative seminars. Your attendance will qualify you for a special discount for our estate planning services should you decide to make a free appointment at the conclusion of the seminar and choose to proceed with us. We proudly serve clients throughout California with offices in Torrance, Newport Beach, Orange, Woodland Hills and Pasadena.

Philip J. Kavesh
Nationally recognized attorney helping clients with customized estate planning guidance for over 40 years.
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