The estates of every U.S. citizen are subject to federal estate tax, but not every estate is required to pay the tax if the amount of the estate is less than the federal estate and gift tax exemption. In 2012, if the estate of a decedent has a net value of $5 million or less, then the estate will pass to the decedent's heirs free from federal estate taxes. The tax exemption also allows individuals to make gifts during their lifetime of up to $5 million. In addition, if the decedent was married on the date of death, and did not use all of the available exemption, the surviving spouse could add any unused exemption to his or her own up to an additional $5 million enabling the survivor to transfer up to $10 million tax free. Use of this "portability" feature can save the surviving spouse a million dollars or more in taxes.
There is a great deal of uncertainty, however, when it comes to estate tax planning since the current law is due to expire on December 31 of this year. If Congress does not act at all, the estate tax exemption will drop to $1 million and the top tax rate would increase from 35% to 55%.
In its 2013 budget proposal, the White House has proposed reducing the estate tax exemption level as well as the top tax rate that would be applied. The exemption would go from $5 million to $3.5 million and the tax rate would increase from 35% to 55%.
While changes to federal estate and gift taxes can create a great deal of anxiety, the current situation provides a huge opportunity for individuals with business or other highly appraised assets, to make significant transfers of wealth, tax free. If you have been thinking about business succession planning, or making gifts of real estate or other assets to the next generation, now is the time to talk with an estate planning attorney who can assist you in implementing a strategy that takes advantage of the tax laws before they change. To create or amend your estate plan with these pending changes in mind, please call our office to schedule an appointment with one of our attorneys who are knowledgeable in the areas of trusts and estates, tax, and business law.