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Updated 2013 Federal Inheritance and Estate Tax Laws


One of the many changes that were the result of the year-end fiscal cliff deal were new estate tax rules that could have a major impact on your current estate plan.  These changes mostly affect those whose wealth is in the multi-millions, and these rules are subject to change again in the next few years. Here is a quick breakdown of the changes for inheritance and estate tax in 2013:

·         You and your spouse may now exclude a lifetime amount of $5.25 million dollars each from estate taxes.  This amount includes gifting.  This also allows more potential for maximizing options like setting up trusts for family members.

·         Lifetime gifting limits rose by $130,000 dollars to account for inflation so if you had previously maxed out your lifetime amount you now have an additional $130,000 you are allowed to gift in 2013. 

·         The estate tax rate has now moved to 40% down from 55% in many states.

·         Beginning in 2014 annual gifting has gone from $13,000 to $14,000 and these annual gifts will not count against your lifetime $5.25 million exclusion.  This means that you and your spouse could each gift your child $14,000 per year—totaling $28,000.  These gifts could also be placed in trusts or college funds for grandchildren.

With these federal tax law changes and dollar amounts changing sodrastically it is estimated that only 3,800 estates in America are large enough to owe estate tax in 2013.

These changes offer much relief for families in large cities like New York, Chicago, and Los Angeles that have high real estate prices.  Before these changes were added in the year-end fiscal cliff deal these estate tax payers were looking at a 55% tax rate and exclusion of only $1 million per person.

What may come as a surprise is that the unstable state of our economy may assist in further decreases the value of securities, real estates, and businesses.  This means that for the time being you are able to get more out of your estate. 

Many people choose to transfer their assets to trusts that that are funded with low-priced stocks slated for long-term growth.  While the heir of the trust will likely be subject to capital gains taxes, their tax rate is currently at a much lower 20%.

While these changes are welcome by many who were expecting to pay more significant tax rates this year, it is met with a bit of frustration.  Last year there were a lot of last minute scrambles to adjust estate planning in response to the changes there were initially expected to go in effect in 2013.

However, the multiple estate tax planning adjustments are to be expected when you are wealthy in America.  The new tax rules that are in place now are subject to change again in just a few years. 

The key to staying on top of your estate is to plan ahead and revisit your plan each time inheritance tax laws are adjusted.  Planning may take a bit more time and energy than you want to expend, but it is worth it to ensure that your estate is well managed and goes to the ones you desire once you are gone.

Keep in mind that while these inheritance tax changes have been implemented at the federal level, your state level tax rules may be more restrictive so be sure to consult with your tax advisor when making any adjustments to your estate plan.

If you would like to learn more about federal IRS inheritance income tax rules, you can visit the website of TurboTax Online.