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Estate tax compromised reached; good planning still necessary

Since the end of the election season, the attention of the media was firmly focused on the fiscal cliff and what lawmakers needed to do to avoid the tax hikes and spending cuts that would occur at the beginning of 2013.

At the last minute, Congress reached a compromise to solve the problem, at least temporarily. Now that changes have been made, it is important to understand the specific impact they will have on estate taxes and the implications for families.

Old estate tax rules

Before the changes were made, estates worth less than $5.12 million were excluded from paying estate taxes, while those worth more than that were taxed a rate of 35 percent. This rate also applied to gifts over $13,000. Data from the independent Tax Policy Center show that the estates of 0.2 percent of all people who died in the United States in 2012 – or about 3,600 estates – would have qualified for taxation under those rules.

If those tax rates were allowed to expire on January 1, 2013, the estate tax rate would have increased while the amount at which estates are excluded would have decreased. Estates worth $1 million or less would have been excluded from paying estate taxes and any estate worth more than $1 million would have been subject to a 55 percent tax rate, as would gifts over $13,000. In addition, a surtax of five percent may have been applied to some very large estates.

The Tax Policy Center estimated that if these new rules went into effect, the estates of 2 percent of people who die in 2013 – the equivalent of 53,000 estates – would have been affected.

Details of the compromise

The compromise reached at the beginning of January largely kept intact the tax system that has been in place for the last two years. However, it did make some changes to the estate tax.

The maximum estate tax rate is now 40 percent. It was 35 percent before the deal was reached.

While the compromise did not change the size of an estate that can be passed on tax-free, the IRS did adjust the estate tax exclusion to account for the effects of inflation. For deaths that occur in 2013, the estate tax exclusion will be $5.25 million.

As before, legally married widows and widowers can receive their spouse’s entire estate tax-free. The compromise kept a provision in estate tax law that allows surviving spouses to add any portion of the $5.25 million that the deceased spouse did not use to their own estate tax exclusion.

Working with an estate planning attorney

Contrary to popular perception, the estate tax doesn’t just affect the super-wealthy. Small business owners and family farmers, who often have more assets than one might expect because of the nature of their businesses, regularly end up facing significant estate tax concerns.

Many estate tax issues can be mitigated with proper estate planning. If you have any questions about how the estate tax might affect your family, it is a good idea to consult with an experienced estate planning attorney.

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