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Gift and estate tax changes after 2012 'fiscal cliff' bill, pt. 1

There has been much uncertainty with what Congress would do to the estate and gift tax rates and limitations, but that has all been determined with the American Taxpayer Relief Tax Act of 2012. Now, California estate planning attorneys have a tax code they can work with for the long-term. Few changes were made but the important point is that Congress made the system that has been in place for two years permanent.

Had Congress not acted as it did in the midnight hours of New Year's Eve, the tax-free amount would have changed back to $1 million with a tax rate of 55 percent. What lawmakers did change was the estate- and gift-tax rate, which was increased from a maximum rate of 35 percent to a top rate of 40 percent. Still many folks have questions regarding what this deal may mean to them in regards to estate tax planning.

The basic exclusion amount a person can transfer to a beneficiary tax-free during life or after death was actually raised from $5 million in 2010 to $5.12 million per person in 2013. This figure is generally adjusted for inflation; however the IRS has not announced any adjustments for inflation to the tax exclusions for 2013. The new law made permanent the 2010 law regarding the unlimited marital deduction when one spouse inherits from another, deferring taxes until the second spouse dies.

Now a surviving spouse can add any unused exclusions from the spouse who recently died to their own, which allows them together to transfer a maximum of $10.24 million tax-free. This is called portability by estate tax planning professional and is not automatic and requires the executor of the estate of the deceased spouse to transfer the unused exclusion to the survivor. Once this is accomplished, the surviving spouse can make lifetime gifts or transfer the assets through his or her estate.

Certain documents must be filed within nine months for portability, however a six month extension may be allowed. The estate tax and life-time gifts are a combined total of $5.12 million per person and the IRS expects you to keep a running total of life-time gifts. For example, if you give a life-time gift of $1 million, your total tax-free exclusion amount upon your death is $4.12, not $5.12. We will continue this important topic on the recent estate and gift tax changes in next week's post.

Source: Forbes, "After The Fiscal Cliff Deal: Estate And Gift Tax Explained," Deborah L. Jacobs, Jan. 2, 2013

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