In a previous blog, I talked about why having a will and a complete estate plan is important. While it’s often difficult to talk about and plan for the end of your life, it’s a necessary step to protect yourself and your family.
In 2012, many Americans wanted to set up an estate plan, but were concerned about the fate of the estate tax. With the fiscal cliff looming and the estate tax rate up in the air, many found it difficult to decide on the proper planning techniques or rushed to give away money that they thought would be taxed the next year.
Since Congress passed a last-minute deal addressing the estate tax and other issues, you may be able to rest easier regarding your estate plan. A recent New York Times article outlines the changes that were made in the fiscal cliff deal.
If Congress had not come to a new agreement, the estate tax rate was set to increase to 55% on estates worth above $1 million, a large decrease from 2012’s exemption of $5 million. This would most likely have exposed millions of Americans to the federal estate tax.
The new deal makes the current exemption permanent and allows it to adjust for inflation each year. The current exemption is $5.12 million, according to TaxFoundation.org. The estate tax rate will increase to 40% above the $5.12 million exemption, which is certainly more favorable than the 55% planned. This means that most Americans will be able to avoid a large federal estate tax bill.
According to TaxFoundation.org, the current estate tax is at nearly the lowest point that is has been in the past decade, notwithstanding last year’s rate of 35% and 2010’s lack of any estate tax entirely. Since 2000, the estate tax rate has been steadily falling (apart from the two exceptions above), and the exemption has been getting more generous. In 2000, the exemption was only $675,000.
However, there still remain a few concerns, one of which is state estate taxes. Although many Americans may be able to avoid the federal estate tax, those who live in states with lower exemptions will find themselves facing taxes. Each state has its own rules, which vary widely. Connecticut, for example, only taxes gifts, while Florida and Ohio have no estate tax at all.
If you have questions about how the new estate tax could impact your estate plan, contact an estate planning attorney at Lovett & House Co., LPA.