Congress has, for the time being, managed to steer the country away from the fiscal cliff. But the deal that was reached in order to avoid the cliff has caused some confusion in the world of estate planning; specifically, the portions of the deal that have to do with taxes. This confusion is understandable, given the amount of partisan rancor that had been bandied about in the days leading up to the deal, so the following should serve to answer some of the questions that exist:
When does one need to pay the federal estate tax?
In 2012, the government allowed each American to transfer up to $5.12 million, tax-free, during the course of their life or upon their death. Under the terms of the fiscal cliff deal the exclusion is $5.25 million in 2013 after an adjustment for inflation.
Must spouses pay the estate tax when inheriting from each other?
Although it only applies to an inheriting spouse that is a U.S. citizen, the marital deduction has not changed under the new fiscal cliff deal. Thus, unlimited deductions from the estate and gift tax are still postponed until the second spouse dies.
What is the tax-free amount that the second spouse may transfer?
The second spouse is allowed to add any unused exclusion of the first spouse to their own exclusions; therefore, if the first spouse did not use any exclusions, it is possible for the second spouse to transfer up to $10.5 million tax-free.