Certified Public Accountant

Will the new “fiscal cliff” Federal Estate Tax provisions affect you and your family?

One of the economic worries as we approached that deadline known as the “fiscal cliff” had to do with estate tax. Federal Estate Tax concerns everyone who might be reading this or doing any financial planning, whether for a parent or for their business. Congress has allowed the estate tax exemption to become very generous, for instance that a single person, when they pass away, can leave $5,250,000 under current law in assets to anyone they choose without paying any Federal Estate Tax. This is above and beyond anything they might leave to charity. Anything left to recognized 501C charities is totally outside the estate tax. A married couple gets the benefit of leaving twice that.

Before the current estate tax law, if one spouse passed away, there was no benefit to the other spouse. Let’s say the exemption at the time was $2,000,000 per spouse. If the first spouse died and was not worth $2,000,000, the difference between their value and the total exemption was lost. When the other spouse passed away, they would get only the $2,000,000 exemption.

One of the provisions of the new estate tax law, is a thing called portability. For example, let’s say a couple together is worth $10,500,000, but the husband, who dies first, is only worth $3,000,000. The other $7,500,000 in assets are in the wife’s name. With portability, she can use the portion of the $5,250,000 million estate tax exemption less her husband’s $3,000,000 and add that to her own exemption when she passes away, giving her an effective exemption of $7,500,000. What is important to note here is that the surviving spouse, if she or he marries again will lose that advantage. Another instance where tax planning affects marital planning.

That is brand new legislation and very effective in helping families hold on to any wealth they’ve accumulated through their lifetime or inherited through people before them. This is a very, very generous law which probably exempts a majority of the population from ever having to deal with estate taxes. What is amusing is that a lot of middle class people get all up in arms when they hear that the estate tax, the actual tax, not the exemption, is going to be a little higher. In reality, the estate tax will never touch 97%-98% of American families.