Estate Planning Post Fiscal Cliff

  • By:Winer Bennett

As part of the “fiscal cliff” legislation passed earlier this month, Congress fixed the federal estate tax credit at $5.12 million.  This generally means that estates of individuals having less than $5.12 million at death will not be liable for any federal tax.

Congress also extended the so-called “portability” of the credit that allows surviving spouses to use the portion of the credit not used by a deceased spouse.  Such portability allows a married couple to pass $10.24 million to their children or other beneficiaries free of federal estate tax.

The new legislation also fixes the federal gift tax at $5.12 million.   Individuals may generally make lifetime gifts totaling $5.12 million without incurring any federal gift tax.  The gift tax credit remains unified with the estate tax credit.  In other words, an individual has a $5.12 million credit to be used during lifetime or at death.  If an individual makes a $500,000 lifetime gift, then the individual’s estate tax credit to be used at death will be reduced accordingly.

Finally, the federal gift tax annual exclusion is $14,000 for 2013.  Individuals may gift up to $14,000 to each of as many people as the individual chooses during the calendar year.

Clearly we are not in Kansas anymore.  Gone are the days when many middle class individuals and married couples required credit shelter or bypass trusts to reduce or eliminate federal estate tax exposure.  The new law, including the flexibility afforded by the portability provisions, renders estate tax planning a non-issue for all but the very wealthy in New Hampshire.

That said, a comprehensive estate plan remains as important as ever.  Most individuals and families will continue to face estate planning issues unrelated to taxes:  management of assets for minor children, proper beneficiary designations for 401(k)s and IRAs, health care directives, and planning in second marriage situations.  Tax planning was always just a portion of the estate planning process.

In my practice, I have always found that the majority of adverse consequences stemming from a failure to properly plan have absolutely nothing to do with the federal estate tax.  More often than not, I find that a lack of planning results in losses or depletions in estates due to outdated or incorrect beneficiary designations on life insurance or retirement plans, plans that pass wealth onto children in an inefficient manner, and dissention among beneficiaries.  These dangers will always be present regardless of changes in the federal estate tax system.

By:  Brian C. Kelly

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Posted in: Estate Planning