We've been talking about the estate and gift tax exemption debacle on this blog for a number of months now, informing our readers about the changes that could come in the New Year, and trying to stay on top of any developments. Now that Congress has come up with a fiscal cliff deal, we are able to relate to our readers how the changes will affect estate planning in the coming year.
To put it simply, the deal Congress came up with made the system that has been in place over the last two years permanent. Under the 2010 law, each taxpayer was allowed to transfer up to $5 million during life or at death, free of tax. This basic exclusion amount was adjusted over the last two years to account for inflation, so that taxpayers could transfer up to $5.12 million free of tax. The 2013 tax law keeps the same system, with some slight changes.
The new law doesn't change the unlimited spousal deduction, which allows spouses to transfer an unlimited amount to one another at death. The amount the second spouse may transfer tax-free at their death, though, requires more explaining. 2010 tax law permitted married couples to add any unused exclusion amount of the deceased spouse to that of the surviving spouse. This "portability" feature allowed married couples to transfer up to $10.24 million.
Portability is not automatic, because the executor of the estate needs to transfer the unused amount to the survivor, who may then use it for lifetime gifts or to pass assets through his or her estate. The return is due nine months after death, and if the executor doesn't file the return or misses the deadline, the right to portability is lost. Because of this, it is wise to take precautions to preserve that right.
In our next post, we'll continue looking at this topic.
Source: Forbes, "After The Fiscal Cliff Deal: Estate And Gift Tax Explained," Deborah Jacobs, January 2, 2012
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