The conventional wisdom among attorneys and CPAs who plan for estate taxes, right up until the new Fiscal Cliff legislation was signed into law, was that the $5 million exemption was probably too good to be true. Couples could gift up to $10 million to their heirs without paying any gift taxes. And if you died with less than $5 million in your estate, your spouse could pick up the remainder and add it to his/her exemption, meaning that any family with less than $10 million in assets passing on to heirs could, with virtually no planning, escape federal estate taxes altogether.
A deal like that won’t last in this age of budget deficits, right? During calendar 2012, the assumption was that Congress would set a lower exemption of anywhere from $1 million to $3 million per individual. So estate planning professionals busied themselves drafting irrevocable grantor trusts and advising their clients to put millions of dollars out of reach of the anticipated new estate tax realities.
Then something funny happened: when it passed the American Taxpayer Relief Act of 2012, Congress not only made the $5 million exemption permanent, it also indexed those historically-high exemption amounts to inflation, so that this year the personal estate tax exemption climbs to $5.12 million. And contrary to virtually every professional expectation, Congress also kept the gift tax exemption at the same level as the estate exemption--and made THAT permanent. Many were speculating over the past couple of years that the linkage between the gift tax and estate tax exemption had been a careless mistake by the committee members who had drafted prior legislation. The result? Assuming these thresholds stay permanent, the overwhelming majority of American citizens won’t have to face an estate tax ever again.
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This article was published in Founders FCU Open Exchange Newsletter (April 2013). It was written by Larry and Kris Carroll and reprinted by permission.