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A post-fiscal cliff guide to estate taxes

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The fiscal cliff’s been resolved, but that doesn’t mean most of the information coming out of the resolution is completely clear or easily understood. This article is an overview of what can be expected in this and coming years with regard to estates.

Permanent extension

If it ain’t broke, don’t fix it — at least that’s the way Congress saw things when it permanently extended the system in place for the last few years. One of the greatest concerns about the fiscal cliff was whether these changes would be extended or whether estate taxes would revert to a different amount. This is an important accomplishment, and an area that raised a great deal of concern from policymakers and the public alike. Without this movement from Capitol Hill, the tax-free portion of estates would have changed to $1 million per person.

Life transfer caps

The gift tax changes have important implications for anyone involved in the financial industry. The 2010 “tax-free” life transfer was capped at $5 million, with an increase to $5.25 million in 2013. These increases do take inflation into account. One other change is that the federal estate tax rate on the biggest of all estates has risen to 40 percent, up from 35 percent in previous years. Those who exceed the limit for transfer (or the heirs receiving the money) will now be responsible for paying that 40 percent tax.

See also: The road ahead for estate planning


One interesting facet of the federal estate tax exclusion is portability, which refers to married couples. If one spouse passes away, the other spouse generally becomes eligible for whatever remained of the exemption amount for the deceased spouse. This essentially gives a widowed spouse the opportunity to gift up to $10.5 million beginning in 2013. Likewise, married couples can take advantage of this transfer exclusion during their life, which enables tax-free gifts to children. Bear in mind that as these gifts grow, the total exclusion is shrinking, so it’s important for parents and grandparents to keep track of gifts already made. This saves a great deal of time and energy when it comes to creating trust documents or determining other legal avenues to maximize tax savings.  

What’s not included 

This is probably one of the biggest areas of confusion for advisors and for families. Every year, individuals are able to pass $14,000 tax free to another person. Amounts greater than $14,000 will be counted as part of the lifetime exemption, but the first $14,000 will not be included. This amount is capped at a per person rate, so a parent could technically pass $14,000 to his or her child, the child’s spouse and each one of the grandchildren without bumping into the lifetime exemption.

Who’s affected

For the course of 2013, it’s estimated that the permanent estate tax will affect less than 4,000 estates, but those are high-net-worth individuals who care a great deal about any and all changes regarding estates. The changes will make a difference to the bottom line of those individuals and families  Most individuals and families will not have a sizable enough estate to worry about many tax complications.

The most critical aspect of all this is that Congress has made the changes permanent, since the tax only affects a particular segment of the population. This will make it easier for those individuals and their advisors to create long-term plans without having to worry about yearly alterations or special planning.

Your role

Advisors can assist with helping clients understand these changes and whether they’re affected with educational outreach and clear materials that break down the convoluted process into basic questions and answers.

Use this confusion as a way to open the conversation about financial affairs. Those who are interested in the changes (even those for whom it doesn’t apply) are obviously giving you a warm introduction to discuss other aspects of their plan or financial situation. Being able to answer difficult questions about tax changes allows new clients to view you as an expert and results in referrals. Since estate planning is all about determining what happens to clients after they’ve passed away, questions about updates in federal policy and law can be used to generate thinking with clients about legacy and their goals for their money after they’re gone.

Since so many clients were concerned about the potential path the financial cliff might lead them down, many rushed to make quick plans or transactions that might not be necessary in light of the real changes. In any case, many plans were made with haste and possibly don’t address all the needs of those particular clients. Now that it’s clear where estate taxes are headed for the future, there’s time to take a deep dive into client information and reassess strategy and plans. For example, anyone who spent the time setting up a trust may feel more comfortable about putting money elsewhere to appreciate over time.

Even clients who aren’t directly affected by the estate tax changes are worth reaching out to. It’s never too early to plan, after all, and in the last few weeks, there’s been news activity about trust and estate information at the state level. Once again, an advisor is in the position to open the conversation and serve as an educator and guide through the minefield of short- and long-term planning.

Estate planning and a long-run look at finances are critical for every client, regardless of income level. The middle market is, in fact, largely underserved. Determine how you can best reach all of your clients this year to discuss planning and goals.

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For more on estate planning, see: 

How to protect life insurance beneficiaries from a windfall

Broken trusts: The man who married his wife six times

Estate planning among top offerings in group legal services


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