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How should I approach estate planning after the fiscal cliff deal? P.1

The recent fiscal cliff deal was a big deal in the estate planning world. In addition to setting the federal estate tax exemption amount permanently at $5.25 million-to be adjusted annually for inflation-the recent fiscal cliff deal also moved the federal estate tax rate from 35 percent to 40 percent. Married couples may pass on $10.5 million free of estate tax, and spousal portability permits a surviving spouse to use any remaining portion of their deceased spouse’s federal estate tax exemption amount.

The lifetime gift tax exemption amount was unified with the estate tax exemption amount at $5.25 million, also to be adjusted annual for inflation. Estate planners have been waiting for something permanent for over a decade, so the changes were certainly welcome.

The generation-skipping tax exemption has also been set at $5.25, making it possible for assets in trust not used by loved ones to skip to the next generation free of tax. Prior to the changes, failure to use of the funds would have meant taxation at a rate of 40 percent. Because of this, funds held in trust can avoid taxes for 100 year or more. This will be a boon to wealthy families whose children enjoy enough assets that they will not be able to spend all the trust assets in their lifetimes.

One of the likely consequences of the changes is that states will come up with new methods to make up for budget shortfalls due to the fact that the high federal estate and gift tax exemption amounts will ultimately reduce states’ future revenue. This is because states used to be able to receive a pickup estate tax allowing them to collect estate tax from the federal government without charging the estate of a deceased person.

In our next post, we’ll continue looking at this topic and some estate planning strategies to explore this year.

Source: Life Health Pro, “The road ahead for estate planning,” John Mcmanus, February 22, 2013.