I have been practicing law since 1996 and there have been a lot of changes in that time. One of the biggest changes has been in the federal estate tax. When I was a new lawyer, the estate tax applied to estates over $600,000. The estate tax rate ranged from 18% to 55%. With the recent passage of the fiscal cliff deal, which is officially named the American Taxpayer Relief Act of 2012, the estate tax exemption amount has been set at $5,120,000 per person and that amount is indexed for inflation. This means the amount of an estate people can leave free of estate tax will continue to grow without requiring further action by Congress.
When the estate tax amount was $600,000, it clearly was an issue for middle class families who had a home, an IRA, some savings, and life insurance. With the estate tax exemption now being set at $5,120,000, the estate tax will only be an issue for wealthy individuals.
The estate tax has been quite a political issue since 2001, when legislation was passed raising the exemption amount each year until it reached $3,500,000 in 2009 and then and providing for a total phase out of the estate tax in 2010. Without further legislation, that law expired (a “sunset” clause) in 2011, and the estate tax exemption would have decreased to $1,000,000. Congress acted to prevent that with another temporary fix and the estate tax exemption continued to rise until it reached $5,120,000 in 2012. However, that legislation also had a sunset clause, which meant the estate tax exemption would revert to $1,000,000 on January 1, 2013.
This legislation appears to now settle the estate tax because it does not include another sunset clause. These sunset clauses made it difficult to plan since estate planning attorneys and their clients did not know what the exemption would be with Congress passing laws that temporarily increased the tax exemption, but with an expiration date.
While some income taxes were raised in the fiscal cliff deal, the change to the estate tax is a continuation of a long-term trend to cut taxes. Some analysts claim that setting the estate tax exemption at $5,120,000 instead of the $1,000,000 it would have reverted to will increase the deficit by $40 billion per year. For the time being, Congress and the Obama administration have decided not to look to a lower estate tax exemption for increased revenue. That is good tax news for middle class families.