Planning your gifts, investments under new estate tax

As readers in Ventura County likely heard, Congress passed a new federal estate tax as part of the so-called “fiscal cliff” deal late last year. Without the deal, the estate tax would have applied to everything over $1 million in a person’s estate. Under the new rules, the amount that is excluded is much higher: $5.25 million per person or $10.5 million per married couple, an increase of $250,000 per person over the previous rate.

In other words, the tax will apply to relatively few people, since most people’s estates are not worth that much. That includes those who live in places like Los Angeles, where real estate is frequently expensive. If the tax had reverted to the old exclusion rule, they may have had a portion of their estate subject to the tax, which has a top rate of 40 percent.

For those whose estates are above the new exclusion lines who want to limit the amount their estate will have to pay in taxes when they die, there are options for reducing their tax liability. One option is to put money in certain types of trusts. When the person passes on, his or her heirs will inherit the investments. They will have to pay capital gains taxes on profits from the sale of those assets, but the current rate on capital gains is 20 percent, half the estate tax rate.

Another is to give gifts of cash. Individuals can give up to $14,000 in gifts without having to pay tax. Couples can gift up to $28,000 tax-free. These gifts can go toward important expenses such as a grandchild’s college education fund.

It is important to always keep the new estate tax in mind when going through estate planning. An experienced estate planning attorney can help point out possible pitfalls and offer solutions.

Source: Reuters, “New estate tax rules call for new planning tactics,” Amy Feldman, Feb. 26, 2013