What the "fiscal cliff" deal means for your estate plan

For more than 10 years, we lived with uncertainty over what would happen to the federal estate tax law. Finally, in early January, Congress and the president brought some certainty to this area as part of the "fiscal cliff" agreement. While laws obviously can change, we now have a federal estate tax law that does not have automatic expirations or changes. We can now plan our estates without having to worry about an ever-changing tax law. Whew!

What does this mean for you? Generally, the American Taxpayer Relief Act of 2012 made permanent the federal estate tax law as it existed in 2012, with a few differences. Following are some questions and answers on the estate provisions of the new law:

Will my estate be subject to estate tax?

First, assuming you are reading this and are, therefore, alive, no Ohio estate tax will apply. Ohio's estate tax expired Jan.1.

At the federal level, estates under $5.25 million (the applicable exclusion amount) are not subject to federal estate and gift tax. That threshold is actually $5 million indexed for inflation—$5.25 million for 2013. It comprises both taxable gifts made during a person's lifetime and the estate passed on after death.

If the rules are followed, married couples are subject to federal estate and gift taxes only if their combined estates, including taxable gifts made during their lives, exceed $10 million, indexed for inflation ($10.5 million in 2013). The new law retains the "portability" provisions of the old law, which means a surviving spouse may continue to use the unused portion of his or her deceased spouse's applicable exclusion amount, if the rules are followed. The new law also retains the unlimited marital deduction, so that generally any amount may be passed free of federal estate tax to a surviving spouse, provided he or she is a U.S. citizen.

If my estate is over the applicable exclusion amount, how much federal estate tax will be paid?

Estates over the applicable exclusion amount—or more than twice the applicable exclusion amount for combined estates of married couples, if portability is fully utilized—are taxed at the rate of 40 percent of the excess.

Will my estate be required to file an estate tax return?

An estate under the applicable exclusion amount is generally not required to file a federal estate tax return. However, a federal estate tax return must be filed to preserve the benefits of portability.

Do all gifts count as taxable gifts?

No. Gifts less than or equal to the annual exclusion amount ($14,000 per recipient in 2013) do not count as taxable gifts.

Gifts made by payments directly to institutions of higher learning for qualified education expenses and to health care institutions for qualified medical expenses also do not count, regardless of the amount.

Should I update my estate plan?

Maybe, maybe not. It depends on whether your estate plan accomplishes your goals in a tax-efficient manner. This would be a good time to review your estate plan to find out if these recent changes allow you to be more flexible in your planning or if your circumstances or goals have changed. You may want to change your marital formula or how your assets are owned in light of these changes. For example, you may be able to leave all your assets to or for the benefit of your surviving spouse without losing your applicable exclusion amount, rather than tying up assets in the family portion of your trust. It depends on your plan, your circumstances and your goals. No one answer is right for all.

—Jim Chriszt
jchriszt@nicola.com