The dreaded fiscal cliff has been averted (maybe), but what does the new law mean for your estate plan? Relating to taxes, there is the good, the bad and the ugly. The following are a few thoughts from a local estate planning lawyer.
The Good If your estate is between $1 million and $5.25 million, you are in the lucky group that is now covered by the “Unified Credit” amount. This means, up to $5.25 million is exempt and will not be taxed at your death by the death tax, and this amount will be adjusted for inflation each year. The rate was previously at $1 million and would have reverted to that amount had an agreement not been meet.
Also, good news is that you can continue to make lifetime gifts up to $14,000 per person per year, without it counting against the exemption. This amount was previously at $13,000 annually.
Additionally, the new law has made portability permanent. Portability allows widows or widowers to add any unused Unified Credit amount of the spouse who died most recently to their own amount. This means a couple could transfer up to $10.24 million tax-free, if they follow the filing rules.
The Bad Portability is not automatic. An estate tax return must be filed when the first spouse dies, even if no tax is owed, to transfer the unused United Credit to the surviving spouse. The return is due nine months after the death of the first spouse, and a six-month extension is allowed. If the executor handing the estate of the deceased spouse does not file the return or misses the deadline, the surviving spouse loses the right to portability.
The take away is that spouses should set up a basic trust for their estate before their deaths that preserves the Unified Credit for each spouse in case the tax return is not filed in time or at all, so they do not lose the Unified Credit amount from the other spouse. This way, together the couple can transfer up to $10.24 million tax free, whether portability is allowed or not.
You many not think this applies to you because your estate is not above $5 million. However, no one knows what the future holds, and you do not want to make your estate pay the high estate tax rate if it is not necessary.
The Ugly If your estate exceeds the Unified Credit amount at your death, your estate will be taxed at the new high rate of 40 percent instead of the old 35 percent rate. This is the highest the estate tax has ever been, and it obviously takes a big chunk of the amount you could have left to your children, grandchildren, or other heirs.
If you do not have an estate plan in place, now is a great time to set one up. Do not allow more of your estate to be taxed than is necessary. Also, make sure your wishes for your estate are known and followed.
Contact Gregory B. Lyle, an estate planning attorney at Shumway, Van & Hansen, to set up an appointment for a free estate planning consultation. For more information please call (801) 478-8080 or stop by our office at 8 East Broadway, Suite 550, Salt Lake City, Utah 84111. We look forward to hearing from you soon.