Fiscal Cliff and Federal Estate Tax

Fiscal Cliff and Federal Estate Tax

The tax compromise between President Obama and the Congress that avoided the fiscal cliff in early January maintained the $5million estate tax and generation-skipping transfer (“GST”) exemption at $5million.  The per-person exemption will be indexed for inflation and will change annually. The top estate-tax rate will rise from 35% to 40%, which split the differences between the parties’ positions.  Should the compromise not have passed, the estate tax exemption would have automatically reverted to $1million per person with a rate of 55% applicable to most estates.
The compromise has also made portability permanent. Spouses can now use any unused exclusion of the spouse who predeceased them.  Accordingly, portability effectively allows spouses to transfer up to $10.24 million tax-free. However, portability requires that the surviving spouse files an estate tax return within nine months of the death of the spouse (with a possible six month extension).

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