Estate taxes may rise in 2013

One of the concerns that California residents have when they do estate planning is the effects of federal taxes on their estate. At the moment, estate taxes have an exemption amount of $5 million with a top marginal rate of 35 percent, but that exemption is set to expire in 2013. If no action is taken by Congress, then the exemption will fall to $1 million and the top marginal rate will rise to 55 percent. So readers of this blog may be particularly interested in a piece of legislation by Rep. Jim McDermott, D-Washington.

The bill, called the Sensible Estate Tax Act of 2011, was recently introduced a week before Thanksgiving. If passed, the bill would allow the top marginal tax rate to rise to 55 percent, as it would under current law. However, the bill also proposes that the current exemption amount be allowed to expire, and that the $1 million exemption be indexed for inflation starting in 2000. That would mean the exemption amount would fall from the current $5 million for individuals and $10 million for couples to $1.31 million for individuals and $2.61 million for couples.

Those changes, if passed into law, could heavily impact estate planning. As it is, if the current exemption is allowed to expire in 2013, many people who are not currently affected by federal estate taxes could find that their heirs may be subjected to potentially large tax rates. Moreover, many are often surprised to discover the size of their estates as it includes property, home furnishings and any investments. Also, if a large amount of the estate is locked up in real or tangible property, heirs may be forced to sell much of it in order to settle with the IRS.

Proper estate planning may be able to minimize the impact of taxes while maximizing the amount left to heirs. Additionally, a well-crafted estate plan may not only minimize taxes but also minimize any potential problems that could arise in probate or between heirs.

Source: The Seattle Times, "McDermott tries again to rewrite estate tax," Kyung M. Song, Dec. 3, 2011

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