The ‘Fiscal Cliff’s’ Effect on Estate Taxes

Author: William P. Dale

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Negotiations between Senate Republicans and Democrats to resolve the “fiscal cliff” continue, with today being the last day before a combination of spending cuts and tax increases are automatically implemented.  Since 2001, the estate tax has gradually been phased out, dropping from 55 percent to 0 percent in 2010.   In 2011, the estate tax returned to the current rate of 35 percent on real estate, stocks, and other inherited assets.  The estate tax exemption has grown over the past decade from $1 million to its current level of $5.12 million.  Note that for married couples, the exemption applies to each spouse, such that the current exemption would be $10.24 million for a married couple.  At present, the Democratic Party wants to revert to 2009 estate tax levels, with a maximum 45 percent tax rate and a $3.5 million exemption, while Republicans would prefer to keep the current rates.  If the two parties cannot come to a compromise, the “fiscal cliff” will cause the tax rate to revert to the 2001 level of 55 percent with an exemption of only $1 million.  A relatively small number of Americans would benefit annually from the more generous estate tax that Republicans are seeking; 7,450 estates, or 0.3 percent of the country’s total, benefited from the rates being cut in 2010.  See Suzy Khimm, The ‘fiscal cliff’s’ estate tax fight, explained, Washington Post, Dec. 30, 2012.  If the current estate tax rates are extended, estate tax revenue will raise $13.5 billion in 2013 and $161 billion by 2021, whereas expiration of the current rates, which will cause the rate to jump to 55 percent, will raise $531 billion by 2021. See Robert Frank, Next Battle on the ‘Cliff’s’ Edge: Estate Taxes, CNBC, Dec. 10, 2012.

UPDATE:  A “fiscal cliff” deal was passed by the Senate on December 31, 2012, and approved by the House of Representatives on New Year’s Day, 2013.  Among other provisions, the new tax law increases the maximum estate tax rate to 40 percent from the previous top rate of 35 percent.  The law preserves the $5.12 million exemption, with an inflation index to increase it annually.  These changes are intended to be permanent, although later legislation could always change this.

Note that in Maryland, there are state estate tax consequences if one’s estate exceeds $1 million.  For a married couple, significant Maryland estate tax savings can be achieved through careful estate planning.

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