The Estate Tax rates and exemption have been in a constant state of flux since 2001. Both the current estate tax exemption and estate tax rate are set to change on January 1, 2013, and for the first time, the exemption may decrease.
The current estate tax exemption is $5,120,000.00. This means a married couple dying in 2012 does not have to do any serious tax planning unless they amass over $10,240,000.00 prior to death. Therefore, tax planning is not a major issue for a majority of Americans. However, change is coming. Unless Congress acts in the next 8 months, the estate tax exemption is set to revert to $1 million per person. This means the same married couple can only amass $2 million before having to pay estate taxes.
Similar changes are slated for the estate tax rate, which currently is a maximum 35%. If Congress does not act by January 1, 2013, the estate tax rate would increase to 55%.
To address the estate tax and estate exemption situation, Congress has four options:
1. If Congress does nothing, the estate tax rate and estate tax exemption revert back to 2001 levels of a $1 million exemption and a 55% tax rate.
2. Congress could keep the current $5 million exemption and the 35% tax rate. The exemption amount would be adjusted for inflation each year.
3. Congress could split the difference and elect to set the estate exemption at $3,500,000 and move the estate tax rate to 45%. In 2008, then Senator Obama endorsed a plan like this, which means this compromise seems to be the most likely scenario. However, Congress’ ability to work together on a comprehensive plan is suspect at best.
4. Congress could eliminate the federal estate tax. An estate would suffer no tax consequences when transferred to children or other beneficiaries.
The estate tax exemption and estate tax rate will most likely change in 2013. If you have not discussed you estate planning options lately, feel contact Ford + Mathiason LLP today to determine the best way for you to minimize the taxes your estate will pay at your death.