Understanding Estate Tax Changes in 2013

by Josh Stelzer

As we exit the first quarter of 2012, there are a few items to consider in regards to your estate plan. Under the current tax law, the estate tax exemption is set to expire and drastically reduce from $5,120,000 in 2012, to $1,000,000 in 2013. The estate tax rate will also automatically rise from 35% to 55%. So the question is…what will be the outcome?

Prior to the 2008 election, Obama introduced a plan to set the federal estate tax at $3,500,000 with a 45% tax rate. This was sharply opposed by republicans who favored a plan which would set the exemption amount at $5,000,000 with a 15% tax rate. Ultimately the two sides reached an agreement (yes this actually happened), and the estate tax exemption was set at $5,000,000, with a 35% tax rate for 2010-2012.

So what will happen to the Estate Tax in 2013? There are a few scenarios that could play out depending on the action taken by congress:

Do nothing. The first option is for Congress to do nothing and allow the current tax law to expire as it is scheduled to do on December 31, 2012. If this happens, then a $1,000,000 estate tax exemption and 55% estate tax rate will be effective on January 1, 2013.

Extend Current Tax Law. The second option is for Congress to extend the current tax law for 2013 and beyond. This would increase the current $5,120,000 exemption by the indexed inflation amount for 2013, and the estate tax rate would remain at 35%.

Pass a compromise bill. The third option is for Congress to pass an estate tax compromise which could lower the estate tax exemption and increase the estate tax rate to something more in line with the 2009 numbers of $3,500,000 and 45%. This may also include a repeal of portability between spouses which is in effect for the 2011 and 2012 tax years.

Repeal the estate tax completely. The fourth option is for Congress to completely repeal the federal estate tax. This is a possibility, however it is fairly unlikely. To repeal a tax law that only affects the high net worth of America is not a very popular move these days.

Your guess is as good as mine when it comes to the changes throughout 2012. There is one thing for sure; estate planning attorneys will most likely have their hands full if a change does take effect.

There are ways to plan around the estate tax, and meeting with a competent estate attorney should be your first step. At the current levels, most Americans are not affected by the estate tax, due to their overall net worth. However, if the limit drops to $1,000,000 ($2 million total for married couples), this will quickly become a much needed area for review in the financial plans of millions of Americans.


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