2013 Federal Estate Tax Exemption
An essential revision to understand for the new tax laws is an increase in the estate tax exemption. ATRA increased this threshold for each individual to be entitled to a life-time $5,000,000 estate, gift, and generation-skipping transfer exemption. Therefore, an individual’s personal estate plus prior gifts made during their lifetime can be valued up to $5,000,000 without owing any estate taxes upon their passing.
Another key characteristic to these new laws is the concept of portability. Portability can be simply stated as allowing for the “Deceased Spousal Unused Exclusion” (“DSUE;” the unused exemption of the last deceased spouse) to pass to the surviving spouse. To illustrate, Spouse A and Spouse B have $5,000,000 in personal property each. Upon the death of Spouse A, Spouse B may add A’s unused exemption to B’s own estate. In short, B would have $10,000,000 in exemptions rather than just $5,000,000. It is important to note that the surviving spouse is the only person entitled to the DSUE.
However, remarrying may pose interesting problems for the surviving spouse. A surviving spouse, who gets remarried after becoming a widow and filing an Estate Tax Return for the DSUE of their first spouse, may not be able to utilize the DSUE of the first spouse upon the death of their second spouse. The logic behind this is a spouse should only be able to utilize their most recently deceased spouse’s DSUE. Thus, to prevent losing the exemption from a previous spouse, it would most likely be in your best interest to contact your attorney prior to remarrying.
It should also be noted that the transfer of the DSUE exemption is not automatic. In order for the surviving spouse to claim it, an estate tax return must be timely filed (even though no estate/death taxes will be owed at that time.) Generally, a timely filing is completed within 9 months of the decedent’s death. This time frame can be expanded through the granting of an extension, but this does not always occur.
NC Estate Tax Law Repeal
North Carolina estate/death taxes have undergone major changes in the past year, as well. In July 2013, legislation eliminated the North Carolina Estate/Death Tax by repealing the language that said death taxes should be imposed whenever a federal estate tax is imposed.
Over the past several years, both Federal and NC laws regarding estate taxes have undergone major overhauls. To understand the current status of Estate/Death Taxes today, an examination of the recent history of federal tax law follows. In 2001, President Bush signed the Economic Growth Tax Relief Reconciliation Act (EGTRRA, better known as “the Bush Tax Cuts”) into law. These cuts were extended in 2010 when the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (TRUIRJCA) was signed into law making these cuts effective through December 31, 2012.
Under the Bush Tax Cuts, which President Obama extended through 2012, individuals with an estate valued at less than the exemption amount for that year were exempt from paying a death tax. These laws hastened the already increasing of the Federal Estate Tax Exemption which ranged from one million to five million dollars except for 2010, when the exemption was unlimited.
Another concept introduced by TRUIRJCA l in 2011 is called portability. Portability is simply the transfer of any unused deceased spouse’s exemption to increase the surviving spouse’s exemption amount. This concept will be discussed further in the following paragraphs.
These cuts were coming to an abrupt end at the end of 2012 and the country was heading toward a “fiscal cliff.” With this looming, President Obama signed “The American Taxpayer Relief Act of 2013” (ATRA) into law on January 10, 2013. This marked the beginning of the current “Estate/Death Tax” law for the US, and essentially cemented the Bush Tax Cuts (with revisions) as “permanent” (subject to any future laws that may be passed) US tax law.
The concepts contained herein are not intended to be a complete summation of the new Federal and NC estate tax laws. Only time will tell whether the aforementioned provisions will remain a permanent fixture in US tax law. With this in mind, there may be other changes applicable to you or your clients. Finally, it is essential everyone periodically review current estate planning documents and assets to determine who owns them and who, if anyone, are named as beneficiaries.