The “Fiscal Cliff” and Your Estate

You’ve heard the media buzz about the “Fiscal Cliff,” but do you know how it may affect you individually? One portion of the Fiscal Cliff Deal affects federal estate taxes for individuals. Specifically, Congress has agreed to visit the issue of the exemption amount and tax rate for estate taxes.

In 2012, any estates over $5.12 Million could be taxed at a rate of 35%. As of January 1, 2013, that rate dropped to $1 Million with a 55% tax rate. This change would have affected an estimated 12.5% of households, or 1/8 of American households. Though many households do not have millions of liquid dollars, estates are valued including real estate, privately owned businesses, and often life insurance policies.  

Over the past several years Congress has had to revisit the issue of the estate tax every year and choose whether to extend the exemption amount. Congress has agreed to pass a bill that would apply retrospectively to include all estates after December 31, 2012. This year, as part of the tax bill, Republicans and Democrats have agreed to renew the $5.12 Million dollar exemption, and a 40% tax above $5.12 million.  The exemption amount is indexed for inflation, meaning it will adjust for inflation automatically in future years. Unlike the last few changes to the gift and estate tax laws, this change is permanent – meaning there is no scheduled end to this exemption amount or this tax rate. However, Congress could revisit this issue at any time and make changes.

As another compromise for the fiscal cliff deal, Congress made the exemption portable between spouses. Each spouse has a $5.12 million exemption, totaling $10.24million between the spouses. The new law made portability between spouses permanent, meaning widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This enables them together to transfer up to $10.24 million tax-free. In order to make sure this portability applies, the personal representative of an estate should file an IRS estate tax return.

The estate tax portion of the fiscal cliff may have affected you and your family members more than you realize. Because Congress decided to extend the exemption and compromised on a tax rate, many families that would have been subject to estate taxes are now exempt.

The Carroll Law Firm offers estate planning consultations. If you have questions on how to set up your estate to offer protection to your friends and family members, feel free to contact us for a free consultation at (623)551-9366 or on our contact form at


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