Estates & trusts

What you should know about estate tax laws

Feb 27, 2012

When most people hear about estate tax planning, they assume it is only for the wealthiest taxpayers. However, recent changes in the estate tax laws have been so advantageous to those passing wealth to another generation that it is worth knowing about them to ensure you make the most of them as possible. Since crucial aspects of these laws are set to expire in 2013, it’s especially worth finding out about them now, according to The Ohio Society of CPAs.

Find out where you stand

Despite the ups and downs in the stock and real estate markets in recent years, many people may be surprised to find how much value they have built up in home equity and in their retirement and investment accounts. If you’re not certain about the value of what you own and how to calculate your net worth, your CPA can help. What you learn could have a significant impact not only on your estate planning, but also on other critical financial decisions.

Consider gift giving options

If you find that you’re in a position to share some of your wealth with other family members, your first step should be to update or write a will. In addition to thinking about estate planning, you should also be aware that you are allowed to give a tax-free gift of up to $13,000 to another individual every year. In the past, you could give a lifetime total of only $1 million tax free, but through 2012 that lifetime total has been raised to $5 million for individuals and $10 million for couples (adjusted for inflation). While Congress may pass new laws in the meantime, that $5 million exemption for individuals is now set to drop back to $1 million in 2013.

Look into the estate tax exemption

The same is true of the estate tax exemption. Through the end of this year, individuals will not have to pay taxes on an inheritance that is worth up to $5 million. Next year, the estate tax exemption will also drop to $1 million, based on current tax law. In addition, the tax on gifts or an inheritance over $5 million is 35% this year, but it is set to jump to 55% in 2013.

Ponder portability

Another advantage in place during 2012 is “portability.” Let’s say a husband dies and leaves an estate worth $2 million. Since he did not use up his entire $5 million estate tax exemption, his spouse’s estate is now eligible to use the $3 million worth of the exemption that is left, giving her a total $8 million estate tax exemption. (Portability will also affect the surviving spouse’s gift tax exemption. Ask your CPA for more details.) Under current law, portability is only available if both spouses pass away during 2011 or 2012, but laws do change, so check in with your CPA if you believe you may be affected.

Don’t forget state taxes

Before you rush to give a substantial gift, or assume that your new inheritance will be tax free, keep in mind that some states have their own separate estate taxes. New York, for example, has a $1 million estate gift tax exemption. If you live in New York and inherit between $1 million and $5 million, you will pay no federal estate taxes, but you will pay state estate taxes on the portion of the inheritance over $1 million. Ask your CPA if your state has its own estate tax laws and how they should affect your estate planning.

Turn to your CPA

Estate taxes are clearly a complicated business, and because of changing tax laws, timing can be a crucial element. Rest assured that your local CPA can help. Consult him or her with all your financial questions.

Copyright 2012 The American Institute of Certified Public Accountants.