Fiscal cliff negotiations may have large impact on estate taxes
Since the most recent election, the most common topic in the news has been the so-called “fiscal cliff.” This refers to the ongoing negotiations between President Obama and the Congress over the growing deficit. The biggest issues concern the potential spending cuts and tax increases that may go into effect if an agreement is not reached by December 31 st.
One of the lesser-known aspects of the fiscal cliff relates to estate taxes. When a person passes away, his or her estate may be subject to state and federal estate taxes. This means that the taxes will be subtracted from the amount of the estate before it is passed to beneficiaries.
Looming change in estate tax exemption
Currently, a 2009 federal estate tax exemption will apply to estates with $5.12 million or less. Any estates with more than that amount will have the excess taxed at a rate of 35 percent. For example, if an individual’s estate has $7.12 million, only $2 million will be subject to the federal estate taxes. This will be in addition to any other state taxes that may be required.
If an agreement is not reached by the end of the year, these rates will change drastically. The federal estate tax exemption will only apply to the first $1 million in any estate, and raise the tax rate to 55 percent. Using the above example, a $7.12 million estate would see $6.12 million of it subject to the 55 percent estate tax rate. This will have a great impact on those who are looking to pass on some of their wealth after they pass away.
There are steps that can be taken to help minimize these tax consequences. Many individuals are attempting to set up an estate plan that helps them avoid the harsh changes if an agreement is not reached. Families that might be impacted by this change are encouraged to get a plan in place as soon as possible, as the current tax rates will probably be as good as they may ever get.
This may also indirectly impact Massachusetts estate taxes as well. Many states are struggling with financial issues, and any cuts made during the fiscal cliff negotiations may reduce the amount of funding they receive from the federal government. States may need to look for ways to increase revenue, and estate taxes may be one item under consideration.
If you have questions about what this may mean for you, speak to an attorney experienced with estate planning and tax issues. This can help you understand what you can do to help you and your family develop a plan that is best for your future. Being prepared for these potential changes will allow you to limit the tax consequences that may arise if an agreement is not reached.