The fiscal cliff deal reached by Congress and the White House at the start of the year gave long-absent stability to estate tax rates and exemptions. Here are the highlights:
The federal estate or death tax rate for persons dying in 2013 is 40 percent. The exemption is $5.25 million. There is no state death or inheritance tax. Thus, if the value of decedent’s estate is $5 million, no estate tax is owed. If decedent’s estate is valued at $10 million, the estate tax due is potentially $1.9 million (40 percent of $4.75 million).
The individual lifetime gift exemption is $5.25 million. The annual gift exemption is $14,000. The exemptions work this way: The donor may give gifts of up to $14,000 in any one calendar year to any number of people without incurring a tax or a duty to report the gift. If the gift to a donee exceeds $14,000 in any one year, the donor must file a Form 709 on April 15 of the year following the gift. During the donor’s lifetime, he may give away up to $5.25 million without owing gift tax. If donor’s gifts exceed $5.25 million, donor owes gift taxes on the excess.
The gift and estate taxes are unified. This means that every dollar of gift tax exemption used during life reduces the estate tax exemption. For example, if decedent made gifts of $3 million dollars during life, only $2.25 million remains of the estate tax exemption to shield death taxes
Since 2010, the estate tax structure was on a short fuse, which created gross uncertainty about proper planning techniques. Many people rushed to estate planning attorneys at the end of 2012 to make substantial gifts to children.
The reason for the rush was that historically high exemptions ($5.12 million) were set to expire on December 31. On January 1, the new exemption amounts were supposed to be $1 million. Tax rates were going to increase from 35 percent to 55 percent. To illustrate the significance of these changes, the tax on a $5 million gift made on December 31 would be zero. If the same gift were made a day later, the tax due would be $2.2 million. However, Congress actually made the exemption amounts permanent with annual inflation adjustment. Thus, the 2013 exemption amount, as mentioned earlier, actually grew to $5.25 million. The rate was set at 40 percent (instead of 55 percent).
Congress also made “portability” a permanent feature of the law. Portability is the idea that the surviving spouse is able to use the unused exclusion amount of decedent spouse’s lifetime exemption.
The new, permanent estate tax schedules will give people the ability to plan their estates in a rational and composed manner.
Federal death tax 40% $5.25 million
Federal gift tax 40% $5.25 million
Edgar Saenz is a Los Angeles estate planning attorney. He is a graduate of Stanford Law School. He is a member of the Trust and Estates sections of the State Bar of California and the Los Angeles County and Santa Monica Bar Associations and serves on the board of the Culver Marina Bar Association. He lectures to attorneys and is judge pro tem. Telephone: (310) 417-9900; email: Edgar@EdgarSaenz.com.