December 30, 2011

Estate Tax in 2012

Since the end of the year is very much upon us, this brings changes to tax law. In particular, the Estate Tax is set to be changed, albeit ever so slightly, in 2012.

1. What will be the federal Estate Tax limit in 2012?

The federal Estate Tax limit in 2012 will be $5,120,000. This was announced by the IRS on October 20, 2011.

2. What was the federal Estate Tax limit in 2011?

The federal Estate Tax limit was $5,000,000 in 2011. When the prior Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the exemption amount was increased to $5M in 2011 and would be indexed for inflation in 2012. The $120,000 increase for 2012 reflects that.

3. What about the California Estate tax in 2012?

There is no California Estate Tax in 2012 for people who pass away after December 31, 2004.

The topic of the California Estate Tax is very popular apparently. It was easily the most commonly used keyword to reach my blog in 2011. For instance, "California estate tax 2011" was used 1,495 times to  reach my blog and "California inheritance tax 2011" was used 767 times to reach my blog.

4. What does the Estate Tax limit mean?

The figures just mentioned represent the threshold amount before tax is owed. For example, if a person passes away with an estate worth $300,000 in 2012, then no Estate Tax is due. However, if the person is worth $100M when they pass away in 2012, then it is likely that the estate will have to pay the Estate Tax. It is not a certainty however that a very affluent individual will be liable for the Estate Tax as there are deductions a person may make to avoid the Estate Tax. For example, it is quite common for the rich (or 1% for you Occupy Wall Street sympathizers) to leave a sizable portion of their estate to charity which thereby avoids the Estate Tax if the donation is large enough. IRC §2055(a).

5. Which year's Estate Tax law applies to a particular estate?

The laws in effect when a person passes away is the applicable law. For example, if a person passes away in 2011, the the limit is $5M, if a person passes away in 2012, then the limit is $5,120,000.

I have been asked on multiple occasions whether or not the year in which the trust or will was written dictates which Estate Tax law applies. No, it does not. Although it is easy to see why a person would want such a scenario. If the Estate Tax was changed, hypothetically-speaking, to a $3M exemption for 2013, people would obviously prefer to have either the 2011 or 2012 law apply because of the greater exemption limit.

Conversely, if you are inclined to leave the IRS your money, despite the inapplicability of the Estate Tax, you may due so by sending a check to the following address:

Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188

6. What does the future hold for the Estate Tax?

The current Estate Tax system is set to expire in 2013 and the exemption amount will revert back to $1M then. Consequently, the next election in November 2012 will greatly impact the specifics of the Estate Tax. Democrats are inclined to lower the Estate Tax limit and Republicans are inclined to increase or possibly abolish it. Thus, the victor in 2012's elections will have the opportunity to craft future Estate Tax legislation.