Now that the new year is here, many estate planners are feeling relieved. Citizens are no longer living in a confusing time for planning, as the exemption amounts and rates for estate taxes have been solidified. This stability is giving many in Massachusetts the ability to make solid plans for tax minimization on their estates.
The fiscal cliff bill, as passed on New Year's Day, allowed the exemption amount from last year to carry over and become the standard. With inflation, last year's $5.12 million rate has become $5.25 million per person. Individuals are allowed to use this as their lifetime gift tax exclusion or as their estate tax exclusion, meaning they can give wealth away throughout their life or after they pass away and it can be tax-free.
The interesting part of this is that, unlike years past, the exclusion is now transferrable between spouses upon the death of one. It has been like this since 2011, but only as a two-year trial run-its existence after 2012 was uncertain. Also known as portability, this became the norm when the fiscal cliff bill was passed. But this transfer is not automatic.
Executors of an estate must file the estate tax return, as is necessary within the first nine months following the death of an individual. If needed, a six-month extension on this filing is available upon request. Once the filing is completed, the remaining exemption is transferred to the spouse of the deceased, who can then use it for her or his estate or lifetime giving. Married individuals should file an estate tax return so that their spouses can receive the exemption, no matter their wealth at the time of death.
Portability does not apply to people who are not citizens of the U.S. It also does not apply to any relationships that are not recognized as marriages at the federal level, considering the tax exemption is through the federal government.
Source: Forbes, "A Married Couple's Guide To Estate Planning," Deborah L. Jacobs, Jan. 9, 2013