Important "News You & Your Family Can Use": New 2013 Estate Tax Laws by Steven Peck

 On New Year's, Congress passed new tax legislation to avoid going over the "fiscal cliff". This included provisions regarding the estate and gift taxes. The news on this front for taxpayers is almost entirely fantastic.

The rules in effect for 2012 were set to expire on December 31. If that happened, the estate and gift tax exemption would have dropped from $5,120,00 to $1million and the rate would have jumped from 35% to 55%. The Obama Administration proposed a compromise which would have reduced the estate exemption to $3.5million but drop the gifting exemption to $1million. The tax rate would have climbed to 45%.

For all the talk about raising taxes on the wealthiest Americans, there seemed to be no arguments about preserving the status quo on the estate tax laws. Not only did Congress preserve all the exemption amounts but they indexed them to inflation. Now the estate, gift and generation skipping tax exemptions are all $5,250,000.

The law was also made permanent, instead of expiring after only a year or two. This means that any decrease in the exemption or increase in tax rate would have to be done by an affirmative vote in Congress. Unfortunately, this is still a real possibility in the next few years since the income tax increase passed was less than the amount of spending increase included in the same bill.

Since it appears Congress doesn't have the will to decrease spending, they are already talking about the need to raise more revenue., The reality is that estate taxes will only raise about $3-5billion this year  since barely 3000 families will owe estate taxes. But if the exemption dropped to $1million, estate taxes could generate around $50 billion per year.

Another feature that was made permanent was the concept of portability of the exemption for married couples. What this means is that even if no estate planning was done before the first spouse died, the survivor could potentially claim both exemptions combined (i.e. $10,500,000). However, there are several limitations to using portability. The survivor must file an estate tax return even if no taxes are owed, which can cost several thousand dollars.  This can be more expensive than the cost of adding tax provisions into an estate plan, which every family should have anyway.

By setting up a credit shelter or family trust for the benefit of the surviving spouse, any growth in this portion of the assets would not be subject to estate taxes. If the assets doubled before the survivor died, the potential estate tax savings could be more than $2million. These trusts also offer creditor protection for the survivor even if taxes are not a concern. Additionally, Illinois does not currently recognize portability so that could cost a minimum of $600,000 since the Illinois exemption  now is $4million with a rate of 8-16% over that amount.

The annual gifting exemption was increased to $14,000 or $28,000 for a couple. While the news is almost entirely good, people still need to do proper estate planning regardless of the size of their estate.

For more information, contact Steven Peck at: 847-940-0607, email Steven directly at: steven@pecktrust.com or go to: www.pecktrust.com