The budget deal that was struck around the new year enabled us to avoid going over what people were calling the “fiscal cliff.” Tax increases would have been one of the consequences of going over this cliff, and they extended to the estate tax.
If nothing would have been done to prevent it, the maximum rate of the federal estate tax would have gone up from 35% to 55% in 2013. The estate tax exclusion was $5.12 million in 2012, but it would have been trimmed down to just $1 million in 2013 if we did in fact go over this cliff.
As it turns out, the compromise that was reached did result in an increase to the maximum estate tax rate. However, it is considerably less than the 20% increase that we would have seen had no agreement been consummated.
The maximum rate of the federal estate tax in 2013 is going to be 40%. This extends to both the gift tax and the generation-skipping transfer tax as well.
Another thing that was decided was that in 2013 the estate tax exclusion will remain portable. This means that your surviving spouse would be able to utilize any unused portion of your unified estate/gift tax exclusion after you pass away.
The intent behind the passage of the “portability” provisions was righteous enough, but as so often happens with good intentions, it ultimately ended up going down the wrong path. In order to take advantage of the portability provisions, an estate tax return, Form 706, must be filed upon the death of the first spouse. Then upon the death of the second spouse, another Form 706 must be filed to claim the exemption. Using an A/B trust format in a living trust does not require the filing of these returns. Thus, choosing to rely upon the portability provisions can result in substantial increased costs, far exceeding the cost of the inclusion of A/B trust provisions in the living trust. Further, the A/B Trust format provides protection against possible estate taxes resulting of growth of the assets held in the B Trust, an advantage surrendered when relying upon the portability provisions. And, in the event of the remarriage of the surviving spouse, the portability provision advantages are lost in certain circumstances. Also, many people will still want to implement A/B trust formats to provide creditor protection to the assets in the B Trust, and to assure that the assets in Trust B will pass to the heirs chosen by the first spouse to pass away (usually their children) as opposed to the heirs of the surviving spouse (such as a new spouse and their heirs). Consulting with a qualified estate planning attorney is advised when considering the use of A/B trusts and the portability provision.
The exclusion amount is remaining constant with a base of $5 million and ongoing adjustments for inflation.
If you are concerned about exposure to the federal estate tax and its 40% maximum rate, we would be more than glad to discuss tax efficiency strategies with you. To set up a consultation click this link: Free Estate Planning Consultation