When Congress passed the American Taxpayer Relief Act of 2012 last week to resolve the so-called fiscal cliff, they made some significant changes to the estate tax system that will greatly benefit a majority of Americans.
Under the existing law, the estate tax exemption (the unified credit) was set to automatically drop from about $5 Million in 2012 to $1 Million in 2013, and the tax rate on estates greater than $1 Million would have increased as well to a maximum tax rate of about 55%, if my memory is correct. An exemption of only one million would have ensnared many Americans, as it doesn't take much - a house, some life insurance, and some modest retirement and savings - to exceed that amount.
Now, based on this new legislation, the exemption (the unified credit) is pegged at $5 Million, indexed to inflation (so this year will likely be around $5.25 million or so), and the estate tax is set at 40%.
There are some other good developments in this legislation for estate tax issues. First, the change is permanent, or at least until other legislation is passed to change it. This is significant because the last few changes had sunset provisions ending the law and requiring Congress to do something. Second, the unified credits (the exemptions) are portable among spouses. So, the portion of the unified credit that is not used by the spouse that dies first, can be added to the credit for the second spouse if properly elected by the executors. This means that more people will be suitable for basic estate planning tools given the larger, and portable, credits.
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