Mansion

Good Times for Estates

President Obama endeared himself forever to wealthier taxpayers when he signed into law the American Taxpayer Relief Act in 2012.  This set permanently the federal estate tax exemption amount to $5 million, adjusted annually for inflation.

Back in 2000, the federal estate tax exemption was $675,000.  With inflation, that figure is and was more and more attainable for estates.  As a consequence, people were getting hit hard with such a low federal estate tax exemption.  Now, thanks to the American Taxpayer Relief Act of 2010, the exemption amount is significantly higher than it had been for years  Far fewer estates fall under taxation beginning in 2012.

That’s good news, and here’s some more: the federal estate tax rate has been falling.  Let’s go back to that dismal year for estates: 2000.  The top estate tax rate was 55%.  Now the top estate tax rate is 40%.

The Federal Estate Tax Exemption is Permanent: What Else?

The American Taxpayer Relief Act also made some other things permanent.  One is something called portability.  When a wealthy person (here, let’s define “wealthy” as someone who has more than the federal estate tax exemption amount, $5.25 million) the fate of his or her fortune largely depends on whether or nor he or she was married.

That’s because the federal estate tax exemption doesn’t count when the heir is the spouse.  He or she can leave all of the fortune to the spouse with no federal estate tax at all.  Even if it’s beyond comprehension to most people: $20 million.  No tax at all.  But when the surviving spouse dies, federal estate taxes will be imposed.

Now, when the first spouse dies and leaves everything to the surviving spouse, he or she didn’t make use of the federal estate tax exemption.  In that case, that $5.25 million exemption amount (for 2013) gets transferred with the money.  Then, when the surviving spouse dies, she gets double the federal estate tax exemption amount.  She can leave $10,5 million to heirs and not pay any federal estate tax.  That’s called portability.

The American Taxpayer Relief Act of 2012 made permanent the idea of portability of the unused exemption amount between spouses.  Before the Act, the idea of portability, the federal estate tax exemption amount, and more were all over the board, changing every year never fixed.  It made estate planning more complicated than it really needed to be.  To make use of portability, IRS Form 706 must be filed when the first spouse dies.

The New Federal Estate Tax Exemption is Good News

What all this means is that dying rich is easier than ever.  It’s the best conditions ever, in the history of our federal estate tax, for transferring wealth.  There are ever more wealth-transfer options not even mentioned in this article, such as Grantor Trusts, an increased Federal Gift Tax exclusion amount, Generation Skipping Transfer Trusts, and all sorts of trusts, which shelter enormous wealth beyond the combined $10.5 million federal estate tax exemption amount.  All in all, I’d say it’s a good time to leave money to your heirs.

 

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