Skip to Content


Estate Planning and the Fiscal Cliff

January 10, 2013 in News

Congress rang in the New Year by enacting legislation to save us all from the “fiscal cliff” the country was precariously dangling from – the “American Taxpayer Relief Act of 2012”. 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. As far as estate and gift tax changes go, there weren’t many made in the new legislation. Here’s the estate and gift tax landscape as of today:

  1. The changes are permanent (until changed by a future congress). We no longer need to worry that our estate tax laws will revert to the laws in place pre-2001 when Congress enacted the Economic Growth and Tax Relief Reconciliation Act of 2001 (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 laws. 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 unless amended by a future act of Congress.
  2. Maximum tax rate is 40 percent. The maximum tax rate is increased from 35 percent to 40 percent for estates over $5.0 million. Although still high, it’s better than the alternative.
  3. No changes in the basic exemption amount for individuals. The American Taxpayer Relief Act of 2012 does not change the federal estate tax exemption. The base amount is $5.0 million for individuals but this amount will be adjusted for inflation each year. In 2013 the basic exemption is actually $5.25 million. This means that an individual can transfer at least $5.0 million (as adjusted for inflation) tax-free either by gift during the individual’s lifetime or following the individual’s death by will, trust or intestate succession. For example, if an individual gifts $4.0 million during his lifetime and dies with an estate worth $1.0 million, the estate will not owe any federal estate or gift taxes.
  4. No increase in basic exemption amount for married couples and portability. Married couples can exempt around $10.0 million from federal estate and gift taxes, but this amount will be adjusted for inflation. Consequently, if both spouses pass away 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 a spouse passes away and her estate is less than the basic exemption amount, the remaining portion of the exemption passes to the surviving spouse. For example, say wife passes away in 2013 and her estate is worth $2.0 million. The remaining $3.25 million of the wife’s exemption can be used by the husband in making lifetime gifts or his estate when he passes away. If husband passes away years later and has an $8.0 million estate, then his estate wouldn’t owe any federal estate taxes since the exemption increased from $5.0 million to $8.25 million. Of course, there’s a catch. For portability, the estate of the wife must file a federal estate tax return even though no estate taxes are owed. Estate tax returns must be filed within 9 months following the date of death. The filed return will be the benchmark for determining the amount of wife’s exemption transferred to husband. Failure to file a return within the 9 month period will most likely result in a loss of the portability option.
  5. No changes to annual gift tax exclusion amounts. Individuals can gift up to $14,000.00 per year, per person gift-tax free and without dipping into the $5.0 million lifetime exemption. Married couples can gift up to $28,000.00 annually, tax free, and without dipping into the federal estate tax exemption.
  6. Unlimited gifts between husband and wife. Married persons can continue to gift/transfer property to each other without utilizing the annual or lifetime gift tax exclusion amounts.
  7. States didn’t change their laws. Just because the feds decided to give you a break, does not mean that Oregon has made similar changes to its estate tax laws. Oregon’s estate tax still applies to estates over $1.0 million and there is no portability. The highest estate tax rate is 16.0 percent. Avoiding the fiscal cliff does not mean that you should avoid your estate planning. The truth of the matter is that a small portion of all estates are taxable – federally or by the state. However, it’s the smaller estates that sometimes need the most planning due to family dynamics, individual beneficiary needs (i.e. individuals with disabilities or that are irresponsible or immature), or your own needs. Proper planning during your lifetime ensures that your money and assets are used to benefit those individuals that you intend on benefiting – not attorneys and other advisers in needless litigation. Any reduction in taxes is icing on the cake. © 1/4/2013 Kevin J. Tillson of Hunt & Associates, P.C. All rights reserved.

Article Source:


Free Consultation

This slideout can include a call-to-action or a quick scroll back to the top.

Scroll to Top