FindLaw KnowledgeBasePublished: 2013-02-14
Americans of substantial means have struggled in recent years with tax and estate planning in part because the federal estate tax has become something of a wild card. With the passage of the American Taxpayer Relief Act, known as ATRA, the federal estate tax rate is finally settled, at least for the foreseeable future.
Fiscal cliff averted
As the new year of 2013 approached, Congress and the president were embroiled in tough, high-pressure negotiations to avoid the so-called “fiscal cliff.” The fiscal cliff is an expression coined to describe federal deficit-cutting legislation that was set to take effect in 2013 that would have set into motion severe cuts in federal spending and the expiration of Bush-era tax cuts. Some feared the austere measures would have sent the economy back toward recession, but on the eve of the new year, Congress and the president were able to agree on the terms of the ATRA.
ATRA estate tax treatment
A key ATRA provision concerned the federal estate tax, which taxes very large estates when they pass to heirs and beneficiaries. ATRA increased the top federal estate tax rate from 35 to 40 percent, but the tax only applies once an estate reaches a value of $5 million per individual (or $10 million per couple). The first $5 million (indexed for inflation) is exempt from federal estate taxation, an extension of the 2012 exemption level.
Estate tax uncertainty
The estate tax had been phased out over a decade, ending with no federal estate tax at all in 2010. For 2011 and 2012, it was reinstated at a top rate of 35 percent with an exemption amount of $5 million. If Congress and the president had not been able to negotiate the terms of ATRA, the 2013 rate would have automatically returned to only the first $1 million of an estate’s value being exempt from estate tax with a top rate of 55 percent.
Critics of ATRA’s higher exemption amount say that the resulting loss in federal revenue effectively changes the main reason for estate tax existence from revenue generation for the federal coffers to only a slight redistribution of the concentration of wealth from the most extremely wealthy Americans.
Supporters argue that the lower exemption amount would have taxed family farms and small businesses at too high a level.
The fluctuations and uncertainty of where the federal estate tax was ultimately headed made estate and tax planning difficult for those of substantial means. ATRA’s estate tax provisions allow tax and estate planning attorneys to advise their clients with more certainty about what to expect going forward.
People of means also may be subject to state estate taxes, which vary widely among the states. New York, for example, taxes estates of $1 million and above at graduated rates.
If your estate is potentially large enough to be concerned about estate taxes, it is extremely important to consult with a knowledgeable and experienced estate planning attorney who can advise you of your options for estate and tax planning methods that maximize the amount of wealth available to your heirs. Such options may include gifting during your lifetime and the creation of certain types of trusts.