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Understanding Federal Estate Tax

On January 2, 2013, the president signed into law the American Taxpayer Relief Act of 2012 (the 2013 Act) that extended certain provisions under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the 2010 Act), which had provided temporary relief from the substantial increase in gift and estate taxes had Congress not acted before January 1, 2011. However, the 2010 Act was set to expire at the end of 2012 if not extended or replaced by Congress by the end of 2012.

Gift And Estate Tax Exemption Amounts And Rates

The 2013 Act made permanent the unified gift and estate tax exemption of $5 million per person, indexed for inflation beginning in 2012, passed under the 2010 Act. The 2013 Act also increased the top gift and estate tax rate to 40 percent.

Portability Of Unused Gift And Estate Exemptions Between Spouses

The 2013 also made permanent “portability” that allows a surviving spouse the ability to utilize any exemption that remains unused upon the death of the first spouse as an addition to the surviving spouse’s own exemption. If elected by the surviving spouse, the maximum amount of the unified gift and estate tax exemption could be as much as $10 million, indexed for inflation, raising the limit in 2018 to $11.2 million. However, in order to take advantage of “portability,” a deceased spouse’s unused exclusion amount is available to a surviving spouse only if properly elected on a timely filed estate tax return of the first spouse’s estate on which such amount is computed, regardless of whether or not the estate would otherwise be required to file an estate tax return.

Step-Up In Tax Basis

The tax basis of inherited property is “stepped up” to the fair market value of the property as of the date of death, and no capital gains tax is due on any gain in value from the decedent’s basis in the inherited property.

What Should I Do Now

You should consider speaking with one of our estate planning attorneys at the law office of Swiren Law Firm, P.A., to discuss possible estate and gift strategies that might allow you to take maximum advantage of the benefits under the new act.