Well, it looks like Congress and the President have agreed on legislation designed to avoid the “fiscal cliff.” Included in the agreement are changes to the federal estate tax, which should be good news for middle class estates.
After an extended and heated negotiation period in which both sides dug their ideological heels into the sand, the agreement delays across-the-board spending cuts (known as the “sequester” cuts) for another two months, ensuring another debate in a few short weeks. The agreement also preserves current tax rates for individuals with incomes below $400,000 and couples below $450,000.
Estate tax changes and the middle class
As far as the estate tax changes are concerned, under the agreement, the estate tax will increase to 40%. However, if an agreement was not reached, the estate tax was set to rise to 55%. In addition, estates worth less than $5 million ($10 million for couples) will be exempt from the federal estate tax. This is important because without an agreement the exemption limit was set to drop to $1 million ($2 million for couples). Since estate tax exposure is calculated on the total value of property owned by the decedent at death, including the value of any life insurance policies, IRAs and retirement accounts, that would have ensnared a large number of middle class estates that are not currently subject to federal estate taxes.
While middle class families can breathe a sigh of relief now that the crisis du jour has been avoided, it is important to keep in mind that this agreement only affects federal estate tax rates and exemptions, and does not necessarily mean your property is safe from taxation by your particular state. For Massachusetts residents, the exemption limit is $1 million. So even though your estate might be free from federal taxation if it is worth between $1-5 million, it could still be subject to Massachusetts estate taxes.
You should consult with an estate planning attorney in your state to see how your assets might be impacted by the new federal estate tax limits and exemptions.