As an estate planning attorney, there is nothing more frustrating than for Congress to keep moving the target.
Federal Estate Tax Laws Are Finally Fixed
Congress approved and the president signed the 2013 fiscal cliff deal, approving an exemption amount of $5,250,000 with a top estate tax rate of 40%. Here’s what that means in real life:
If your “estate” when you die, is worth under $5,250,000, then your heirs will pay zero estate taxes. The first dollar above that amount, however, will pay a 40% estate tax (that’s in addition to any income tax owing). Federal tax law says that everything is valued as of the date of your death. That will include all real estate, bank accounts, investments, stocks, savings bonds, life insurance death benefit (on policies you owned), businesses, and personal property. Everything gets thrown into the bucket; even assets owned by a revocable living trust, if you have one.
This New Estate Tax Law Will Greatly Simplify Planning For Most People
In prior years, the estate tax exemption and tax rate changed every year and then faced a sunset in the years 2010 and 2013. There was a very real possibility that, if Congress failed to act, everyone with estates greater than $1 million dollars would pay the huge 50% tax on every dollar over the first million. This may seem like it would not affect many people, but if you purchase a term life insurance policy of $1 million dollars, that automatically bumps you over the limit! The new tax law makes the $5 million dollar exemption amount permanent and adjusts it for inflation every year.
Estate Plans Developed Before This Change Should Be Reviewed
There is a chance that your trust contains provisions creating a “bypass” or “A-B” trust split if you are married. That was probably created in your plan to help you reduce your estate tax bill (for the year in which the trust was written). If your combined estate is under $5 million dollars, however, those provisions may no longer be necessary and could cause your surviving spouse or children unnecessary complications in administering your trust. With the higher exemption amount, your revocable living trust may be in need of simplification to save some future headaches in administration.