The Fiscal Cliff in Your Estate Plan

On January 1, 2013 there will be substantial changes in the United States Tax laws, as part of the so called “Fiscal Cliff”.  One area scheduled for dramatic change is the gift and estate tax law, especially the exemption available to individuals from gift and estate taxes.

As of this writing, the lifetime exemption available against gift and estate taxes is $5,112,000.00 and the maximum rate of tax for amounts over that limit is 35% for gift or estate taxes.  Additionally, there is currently a separate annual exclusion amount of $13,000.00 per donee for individuals, $26,000.00 per donee for married couples.  In other words, you can give $13,000.00 to anyone without incurring gift tax, and you and your spouse can give a combined gift to anyone of $26,000.00 without incurring gift tax or utilizing any portion of the $5,112,000.00 discussed above.

On January 1, 2013, the lifetime exemption amount is scheduled to decrease from $5,112,000.00 to $1,000.000.00 per person. Additionally, the maximum rate for gift and estate taxes is scheduled to increase 35% to 55%.

Thus, unless Congress and the President act this year, individuals may “lose” up $4,112,000.00 in exemption amount as of January 1, 2013.  The lost exemption could have the substantial impact on your estate plan or those of your family members.

Example 1:  Widower has a total taxable estate of $2,000.000.00, including $500,000.00 of life insurance.  He dies December 31, 2012 under the current tax law and his estate pays 0 taxes, with $2,000,000.00 passing estate tax free to his children.  If he instead dies January 1, 2013 and the current law remains in place, his estate would pay $435,000.00 in taxes and his children would receive $1,565,000.00.

Example 2:  Widower has $6,000,000.00 in assets and wants to make a $2,000,000.00 gift to his children.  If he makes the gift in 2012, he pays 0 gift taxes.  If he makes the gift in 2013, and the current law remains in place, he pays $435,000.00 in gift taxes.

As you can see, the change in law would have a dramatic impact.

It is possible that the current exemption will be extended, or not reduced as dramatically as the current law requires.  However, it will take the action of a divided Congress and the President to pass a bill that deals with estate taxes.  If no action is taken, the exemption currently available will be lost.

We will encourage our clients to review their estate plan in light of this pending change, and decide whether they want to utilize any of the exemption amount currently, in order to hedge on whether or not Washington will act to avoid the Fiscal Cliff.  Please contact one of our Estate Planning Attorneys if you wish to discuss your estate plan.