Estate Taxes Basics
In this part on planning your estate, we will tackle estate taxes and how to get reliable advice when putting together your estate plan.
As you may already know, one of the reasons why estate planning is essential is because you want to take advantage of opportunities that will lower your estate taxes. By definition, an estate tax is levied on the transfer of the taxable estate of someone who has passed away. The assets and property may be transferred through a will following the state laws for intestacy. The transfer of property from an intestate (without a will) estate, from a trust, or even the payment of certain financial account sums to beneficiaries is also covered by estate tax which comprise one part of the Unified Gift and Estate Tax system in the U.S.
On January 2, 2013, President Obama signed the American Taxpayer Relief Act (ATRA) which made significant changes to estate, gift, and generation-skipping transfer tax laws. Under the ATRA, the Federal estate tax exemption increased from $5.12 million in 2012 to $5.25 million in 2013, indexed for inflation. For estates whose value exceeds this amount, however, the estate tax rate has increased to 40 percent from only 35 percent in 2012. The same increases are also put in place for the lifetime gift tax exemption and the maximum gift tax rate.
Generation skipping transfer tax refers to the tax assessed on property passed from one generation to a generation two or more levels below the generation of the individual making the transfer. Assets of an estate transferred by a grandparent to a grandchild or great-grandchild are subject to generation skipping transfer taxes. For 2013, the exemption for a generation skipping transfer tax has been raised from $5.12 million in 2012 to $5.25 million, indexed for inflation. The maximum generation skipping transfer tax rate, however, has been increased from 35 percent to 40 percent for this year.
In addition to the increase in exemptions, the ATRA has also made permanent the portability of estate tax exemption for married couples starting in 2013. This means that if you’re married, you can give heirs up to $10.5 million federal estate tax-free even if you don’t have a plan in place. Just remember that if your spouse is dead and his or her estate is below $5.25 million then you as the surviving spouse should still file IRS Form 706 to add the unused tax exemption of your deceased husband or wife to your own. If you don’t, you will not be able to take advantage of the added exemption.