Estate planning is crucial for protecting your hard earned assets. Earlier this year, legislators finally gave us all some certainty regarding the federal estate and gift tax, which has been in limbo over the past 11 years. Over this time, the estate tax exemption and rates have gone wildly up and down from year to year. In 2001, the estate tax exemption was $675,000 with a top tax rate of 55%, and then in 2012, there was a $5.12 million exemption with a top rate of 35%. For 2013 and beyond, the basic exclusion amount is at $5 million. This number is then adjusted every year to factor in inflation. For 2013 deaths, the exemption amount is at $5.25 million, with a top tax rate of 40% (increased from 35% last year).
The estate tax exemption works like this. The exemption allows for a set dollar amount of property to be passed tax free after death, no matter who receives the property. For any amount passed that is above the exemption level ($5.25 million), the estate tax kicks in, and the deceased’s estate (or their heirs) is then responsible for paying those taxes.
However, there is also a marital deduction, which allows all property left to a surviving spouse to be passed completely free of estate taxes. Furthermore, if the spouse who died did not use up their complete estate tax exemption, the surviving spouse can use whatever is leftover. This is called portability. Portability allows couples to carefully devise estate plans that will give them the greatest tax benefit and avoid potential tax benefits. Portability is a powerful tool but it is not automatic, and several steps must be taken in order for the surviving spouse to take advantage of it. Consult with Atlantis Law LLP for guidance on how to do this and for advice on how to avoid paying estate taxes by drafting a thorough estate plan.