January 2, 2013

Estate Tax in 2013

1. What is the Estate Tax limit in 2013?

The applicable exclusion amount in 2013 is $5M plus inflation.

2. What does this mean?

If an estate is valued at less than or equal to $5M, the Estate Tax will not be applied to the decedent's estate. However, if the decedent's estate exceeds $5M, then the Estate Tax will apply albeit only in regards to the portion above $5M.

For example, Danny Decedent died on New Year's day 2013 in a tragic hot air balloon accident. Danny's entire estate consisted of a $6M bank account because of his miserly ways. Since Danny's estate exceeded the applicable exclusion amount in 2013, $5M, the Estate Tax would apply to the excess, namely $1M. However, if Danny's estate was worth $4.5M, no Estate Tax liability would arise because it does not exceed the applicable exclusion amount.

3. What was the Estate Tax limit in 2012?

The Estate Tax limit in 2012 was $5.12M

4. Which year applies to a decedent's estate?

The applicable year is the year in which person passes away. The chart below summarizes the following years' Estate Tax regime. Consequently, if a person died in 2002, the $1M exclusion amount would apply or if a person died in 2007, the $2M exclusion amount would apply. 

Of note, it does not matter when a person writes their will or trust. I have been asked this question numerous times. Some people are under the impression that the year in which the decedent wrote their testamentary document controls. This is simply not true. I give them credit for creative thinking though. A trust written in 1985 by a 2005 decedent results in the application of the 2005 Estate Tax law, not the 1985 Estate Tax law.

As you can see by the below chart, the applicable exclusion amount has increased tremendously recently. In particular, the rise in the applicable exclusion amount easily outstrips inflation over this time

Year                   Amount Excluded         Maximum Tax Rate

2001                   $675,000                      55%

2002                   $1M                             50%

2003                   $1M                             49%

2004                   $1M                             48%

2005                   $1M                             47%

2006                   $2M                             46%

2007                   $2M                             45%

2008                   $2M                             45%

2009                   $3.5M                          45%

2010                   Repealed                      0%

2011                   $5M                             35%

2012                   $5.12M                        35%

2013                   $5.25M                        40% 

5. What is included in a decedent's estate?

Any personal, real or intangible property the decedent owned wherever located. In other words, everything you own basically. IRC §2031(a). There are other categories of items included in a gross estate but are too technical to explain succinctly.
6. What is not included in a decedent's estate?

Real property earmarked for a qualified conservation easement.  IRC §2031(c).

7. When is the Estate Tax due?

The Estate Tax return must be filed 9 months after the decedent's death unless an extension is granted. IRC §6075(a). The form used is IRS Form 706.

8. Can I get an extension?

Yes, a 6-month extension is automatically granted upon request. Treas Reg §20.6081-1(b). However, this does not extend the time to pay the tax. Generally speaking, the Estate Tax must be paid when the return is filed. IRC §6151(a). 

9. What is the Estate Tax's top rate?

The maximum rate in 2013 is 40%. 

10. Will California have an Estate Tax in 2013?

No, legislation recently passed by Congress to avoid the "fiscal cliff" eliminated the state Estate Tax credit. Therefore, there will be no California Estate Tax in 2013.