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Since the end of the election season, the attention of the media has focused on the fiscal cliff and what lawmakers must do to avoid the tax hikes and spending cuts that will occur at the beginning of 2013. However, absent from the general conversation is the specific impact the changes will have on estate taxes and the implications for families.
CURRENT ESTATE TAX RATES
Presently, estates worth less than $5.12 million are excluded from paying estate taxes, while those worth more than that are taxed at a rate of 35 percent. This rate also applies to gifts over $13,000. Data from the independent Tax Policy Center show that the estates of 0.2 percent of all people who die in the United States in 2012 will qualify for taxation under current rules, or about 3,600 estates.
IF THE BUSH TAX CUTS ARE ALLOWED TO EXPIRE
If current tax rates are allowed to expire on January 1, 2013, the estate tax rate will increase while the amount at which estates are excluded will decrease. Estates worth $1 million or less will be excluded from paying estate taxes and any estate worth more than $1 million will be subject to a 55 percent tax rate, as will gifts over $13,000. In addition, a surtax of 5 percent may be applied to some very large estates.
The Tax Policy Center estimates that if these new rules go into effect, the estates of 2 percent of people who die in 2013 will be affected, or the equivalent of 53,000 estates.
A THIRD OPTION
However, there is another scenario that may occur after the first of the New Year. The president has presented a plan that would reduce the amount at which estates are excluded to $3.5 million and create a new 45 percent rate for estates worth more than $3.5 million. The Tax Policy Center estimates this plan would affect the estates of 7,500 people who die in 2013 and create $22 billion in revenue.
HOW CHANGES MAY AFFECT TEXANS
If the Bush tax cuts are allowed to expire or if the president’s plan is put into effect, the changes could affect a number of estates in Texas. As of 2007, there are about 100,000 estates worth $2 million or more in the Lone Star State. If the Bush tax cuts expire, any of these estates could be taxed under the new rules if their holders die in 2013.
Additionally, there is concern that small-business owners and family farmers, who often seem to have more assets than they do because of the nature of their businesses, would be disproportionately hurt by any changes to current estate tax rules, including those in Texas. What would be best for these folks and people across the country is for Congress to develop permanent tax reform so small-business owners, farmers and others can plan for their tax burden and take steps to give as much of their wealth to beneficiaries as possible.
As Congress and the White House try to work together to avoid falling off the fiscal cliff, it is possible that current estate tax rules may change. If you are concerned the changes will affect your estate, please contact an experienced estate planning attorney.