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How did the estate and gift tax change in the fiscal cliff deal? P.1

We want to update our readers on how the fiscal cliff deal will affect gift and estate tax planning in the coming year. This has, as our regular readers know, been a big issue in the estate planning world, and had many people taking last minute precautions over the last several months, so let’s take a look at what happened.

Essentially, what happened was that Congress made permanent the system that has been in place over the last two years. Under the 2010 tax law, each taxpayer can transfer as much as $5 million free of tax during life or at death. This is the basic exclusion amount, and is adjusted for inflation, making the exclusion amount $5.12 million person during 2012. The new tax law does not change how much one can pass tax-free.

This is a good thing. As we’ve referred to in many previous articles, had Congress done nothing, the combined estate-gift tax exemption amount would have gone down to $1 million per person, and the tax rate for most estates would have increased to 55 percent.

The new law doesn’t change the unlimited spousal deduction, under which spouses can pass as much as they want to one another at death. When it comes to how much the second spouse can pass tax-free, though, things get a little more complicated. Under the 2010 tax law, married couples can add any unused exclusion amount of the deceased spouse to their own, which enables couples together to transfer up to $1024 million. This has been referred to as “portability.”

In our next post, we’ll continue looking at this topic.

Source: Forbes, “After The Fiscal Cliff Deal: Estate And Gift Tax Explained,” Deborah Jacobs, January 2, 2012