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Overview of Current Federal Estate Tax Laws

Finally, Some Permanency Has Come to the Federal Estate Tax Laws

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On January 1, 2010, the federal estate tax was officially repealed, but on December 17, 2010, it was brought back retroactively to January 1. Historically the federal exemption from estate taxes and estate tax rate has changed as listed below in the Federal Estate Tax Schedule.

Beginning in 2012 the federal estate tax exemption was indexed for inflation and this will continue in future years, the estate tax exemption will continue to be indexed for inflation. This annual increase in the federal estate tax exemption may lull many into a false sense of security with regard to estate planning since estate tax planning will no longer be required for the majority of the American population. Nonetheless, there are still quite a few other reasons to put an estate plan in place which have nothing to do with estate taxes.

Estate Planning in 2014 and Beyond

Although the federal estate tax was officially repealed on January 1, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act ("TRUIRJCA" for short) into law on December 17, 2010, which reinstated the estate tax retroactively back to January 1, 2010, and also set new rules for the estates of decedents who died in 2011 and 2012. Then, in the early days of 2013, Congress and President Obama enacted the American Taxpayer Relief Act, which made the estate tax, gift tax and generation skipping transfer tax laws implemented by TRUIRJCA permanent for 2013 and future years with one exception - the top tax rate was increased from 35% in 2010, 2011 and 2012 to 40% in 2013 and future years.

Nonetheless, this new found certainty when it comes to estate taxes, gift taxes and generation skipping transfer taxes should not be used as an excuse to put off making or updating your estate plan, because the consequences of not having an estate plan, or having an outdated estate plan, are simply too great. As mentioned above, planning for estate taxes is only one very small piece of the puzzle, and the beauty of estate planning is that estate plans can be made flexible enough to change as your life and the laws change.

Planning for State Estate Taxes

The other thing that must be considered when planning for estate taxes is where you live since currently a handful of states and the District of Columbia collect an estate tax at the state level and seven states collect a state inheritance tax (Maryland and New Jersey are the only two states that collect both types of taxes):

State Estate Tax and Exemption Chart
State Inheritance Tax Chart

In most of the states that collect state estate taxes, there is a significant gap between the federal estate tax exemption of $5.34 million and the state estate tax exemption. For example, in the District of Columbia, Maryland, Massachusetts, Minnesota, New York and Oregon, the 2014 state estate tax exemption is only $1 million, so in these states planning can be tricky because the wills and trusts of residents, as well as nonresidents who own real estate in these states, need to take into consideration the estate tax gap of $4.34 million between the federal and state exemptions.

What You Should Do

Unfortunately, no one can predict the future and if and when someone will become mentally incapacitated or when someone will die. If you do not have a disability plan, then you and your property may end up in a court-supervised guardianship or conservatorship, and if you do not have an estate plan, then your loved ones will not know what you really wanted and your property may go to someone who you would not have chosen had you taken the time to make a plan. Be smart - regardless of the large $5.34 million estate tax, gift tax and generation skipping transfer tax exemptions, be sure to make an estate plan, or update your old and outdated estate plan, to protect you and your loved ones.

Historical Estate Tax Exemptions and Rates

Please refer to the following charts to view historical information about the federal estate tax exemption and rate:

*The heirs of decedents who died in 2010 had to choose between using the $5,000,000 estate exemption/35% estate tax rate or $0 estate tax exemption/0% estate tax rate coupled with use of the modified carryover basis rules.

Federal Estate Tax Schedule

YEAR EXEMPTION TAX RATE
2009 $3,500,000 45%
*2010 $5,000,000 or $0 35% or 0%
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%

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