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How the Fiscal Cliff Budget Deal Affects Your Estate Planning

The fiscal cliff budget deal reached by Congress at the beginning of 2013 was complex and confusing to many Wisconsin residents but its effects are important to know, as portions of the bill can directly impact your long-term estate planning.

In December 2010, Congress and President Obama reached an agreement on a piece of tax legislation called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (“TRUIRJCA”). This law set the estate tax exemption at $5 million, with that amount indexed for inflation in 2012. The law expired at the end of 2012. As that expiration approached, the estate tax exemption was poised to decline sharply (to $1 million,) and potentially trigger a huge impact on estate planning.

To avert this, Congress passed the American Taxpayer Relief Act of 2012 (“ATRA”), which President Obama signed on January 2, 2013. The compromise permanently set the estate tax exemption at $5 million per individual and tied it to inflation. (The 2012 exemption is $5.12 million, with the 2013 exemption set at $5.25 million.) For those estate that exceed the exemption amount, the new law raises the top estate tax rate from 35% to 40%. Without the ATRA, the estate tax exemption would have tumbled to $1 million, and the maximum tax rate would have climbed to 55%.

The ATRA also made permanent a provision of the 2010 law that allows widows or widowers to apply the unused portion of their deceased spouses’ estate tax exemption to their own, meaning that the couple may be able transfer double the applicable exemption amount tax-free. This “portability” of the estate tax exemption is not automatic and requires proper planning to accomplish.

Although many may feel that a figure of $5 million or $10 million is too large a number to apply to them, consider that it can include savings, pensions, investments, art, jewelry, IRA accounts, 401(k) accounts, property and other items often passed down from one generation to another.

The federal statute averting the fiscal cliff also had a ripple effect on Wisconsin tax law, as well. Wisconsin has a state estate tax, but it is a “pick-up” tax, meaning that it is equivalent to the federal credit for state death taxes allowed under the federal estate tax. The fiscal cliff legislation made permanent the elimination of that federal credit, meaning that it essentially eliminated the Wisconsin estate tax permanently, unless the state legislature changes the protocol for calculating state estate taxes.

Here are a few other implications of the fiscal cliff budget deal:

  • Income tax rates will remain lower for those individuals making under $400,000 and couples making under $450,000. For those earning over those amounts, the income tax rate will increase from 35% to 39.6%. Those dollar amount thresholds will be indexed for inflation beginning in 2014.
  • Capital gains and dividends taxes will increase from 15% in 2012 to 20% for those individuals making over $400,000 or $450,000 for couples.
  • The IRA charitable rollover was extended through 2013 by the fiscal cliff deal. This means that those individuals over the age of 70 1/2 can transfer up to $100,000 to charity of their choice, directly from their IRA assets.

Whether you have concerns about estate tax exemption portability, questions about other aspects of the new law’s impact on your existing estate plan, or you desire to have a consultation to discuss a plan that can help you meet your goals, you need to seek the advice of a Wisconsin lawyer who is skilled in all areas of probate and estate planning.

Daniel J. Krause is a Madison, Wisconsin lawyer with nearly 14 years experience. The Law Offices of Daniel J. Krause specializes in estate planning, trusts, wills and probate matters.

Please contact us online for a no-obligation initial estate planning consultation.

Other Resources:

More Estate Tax Changes Could Follow Fiscal Cliff Deal, Forbes, Article by Hani Sarji, January 6, 2013

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