A post-fiscal cliff guide to estate taxes

Estate taxes are one reason for estate planning. Given that estate taxes often vary from state to state, it is important to stay informed with recent Congressional changes which may seek to alter tax code and gifting guidelines for families and individuals alike. With the recent fiscal cliff resolution in Congress, Arizona living trust attorney Giancarlo Estrada has provided a guide to the estate tax changes on behalf of LifeHealthPro.

Permanent extension

If it ain’t broke, don’t fix it — at least that’s the way Congress saw things when it permanently extended the system in place for the last few years. One of the greatest concerns about the fiscal cliff was whether these changes would be extended or whether estate taxes would revert to a different amount. This is an important accomplishment, and an area that raised a great deal of concern from policymakers and the public alike. Without this movement from Capitol Hill, the tax-free portion of estates would have changed to $1 million per person.

Life transfer caps

The gift tax changes have important implications for anyone involved in the financial industry. The 2010 “tax-free” life transfer was capped at $5 million, with an increase to $5.25 million in 2013. These increases do take inflation into account. One other change is that the federal estate tax rate on the biggest of all estates has risen to 40 percent, up from 35 percent in previous years. Those who exceed the limit for transfer (or the heirs receiving the money) will now be responsible for paying that 40 percent tax.

Portability

One interesting facet of the federal estate tax exclusion is portability, which refers to married couples. If one spouse passes away, the other spouse generally becomes eligible for whatever remained of the exemption amount for the deceased spouse. This essentially gives a widowed spouse the opportunity to gift up to $10.5 million beginning in 2013. Likewise, married couples can take advantage of this transfer exclusion during their life, which enables tax-free gifts to children. Bear in mind that as these gifts grow, the total exclusion is shrinking, so it’s important for parents and grandparents to keep track of gifts already made. This saves a great deal of time and energy when it comes to creating trust documents or determining other legal avenues to maximize tax savings.

What’s not included 

This is probably one of the biggest areas of confusion for advisers and for families. Every year, individuals are able to pass $14,000 tax free to another person. Amounts greater than $14,000 will be counted as part of the lifetime exemption, but the first $14,000 will not be included. This amount is capped at a per person rate, so a parent could technically pass $14,000 to his or her child, the child’s spouse and each one of the grandchildren without bumping into the lifetime exemption.

For more information on Phoenix estate planning, please visit or contact Attorney Giancarlo Estrada.