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How did the estate and gift tax change in the fiscal cliff deal? P.2

In our last post, we informed our readers about the new gift and estate tax rules that came out of the recent fiscal cliff deal. As we noted, the potential change has been a huge issue in the estate planning world for some time, attorneys not knowing what the future would hold and clients not sure what to do with their wealth. The bottom line is that the system that has been in place over the last two years was extended indefinitely.

We left off last time discussing how the new tax law leaves in place the portability aspect of the estate tax exemption, enabling a surviving spouse to use of any remaining portion of the exemption.

Nothing has changed in terms of lifetime gifting either. The lifetime gift tax exclusion and the estate tax exclusion are combined, making for a current total of $5.12 million per person. One can use the exclusion to transfer assets during life, at death, or do a combination of these two approaches. A tax of up to 40 percent will be imposed, though, on amounts exceeding the limit.

Taxpayers are expected to keep records of their gifts and to report them, so that the IRS knows how much has already been used at the time of death. Couples can take advantage of gift-splitting and give more to their kids during life, tax free.

Staying with gifting, it should be kept in mind that certain lifetime gifts do not count against one’s lifetime exemption. The annual exclusion allows each individual to give $14,000 per year to an individual, without counting against one’s lifetime exemption. Married couples may combine their annual exclusion to give twice the amount of money to children.

Given that very little changes that have taken place because of the new deal, it probably isn’t critical to review your will at this time. That is, of course, assuming that no major changes have taken place in your life. For those who have gone through such changes, it may be time for a review.

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