Overview of Federal Estate Tax Laws

Permanency Came to Federal Estate Tax Laws in 2013

Freshly printed 100 dollar bills
Mark Wilson/Getty Images News/Getty Images

The federal estate tax was repealed on January 1, 2010, but it was brought back retroactively to January 1 on December 17, 2010 when President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act. TRUIRJCA also set new rules for the estates of decedents who died in 2011 and 2012.

Then Congress and President Obama enacted the American Taxpayer Relief Act in the early days of 2013, making the estate tax, gift tax and generation-skipping transfer tax laws permanent with one exception - the top tax rate was increased from 35 percent in 2010, 2011 and 2012 to 40 percent in 2013 and future years.

Historical Estate Tax Exemptions and Rates

Here's a visual summary of the estate tax law changes that have taken place under this legislation: 

2010*$5,000,000 or $035% or 0%


*The heirs of decedents who died in 2010 had to choose between using the $5,000,000 estate exemption and 35-percent estate tax rate or $0 estate tax exemption and a zero percent estate tax rate coupled with use of the modified carryover basis rules.

The exemption amount increased to $5.43 million in 2015, then to $5.45 million in 2016. The top tax rate remained steady at 40 percent. 

Please refer to the following charts for historical information about the federal estate tax exemption and rate before 2009:

    The Exemption Is Indexed for Inflation

    The federal estate tax exemption was permanently indexed for inflation under the terms of ATRA -- it will increase incrementally every year. This annual increase might lull many into a false sense of security with regard to estate planning because they don't anticipate their estates reaching these financial thresholds.

    But there are still quite a few other reasons to put an estate plan in place which have nothing to do with estate taxes.

    Estate Planning in 2016 and Beyond

    This newfound permanence when it comes to estate taxes should not be used as an excuse to put off making or updating your estate plan. Even "permanent" laws can change with another act of Congress, and the consequences of not having an estate plan or having one that's outdated are simply too great. Planning for estate taxes is only one very small piece of the puzzle, and the beauty of an estate plan is that it can be made flexible enough to change as your life and the laws change.

    Planning for State Estate Taxes

    Fifteen states and the District of Columbia collected an estate tax at the state level as of 2015, and an additional six states also collect a state inheritance tax. (Maryland and New Jersey are the only two states that collect both types of taxes. Here's the breakdown: 

      In most of the states that collect estate taxes, a significant gap exists between the federal 2016 exemption of $5.45 million and the state exemption. For example, the 2015 state estate tax exemption is only $675,000 in New Jersey, and this can make planning tricky. The wills and trusts of residents, as well as nonresidents who own real estate in these states, must take the estate tax gap between federal and state exemptions into consideration. 

      What You Should Do

      Unfortunately, no one can predict the future, when and if someone may become mentally incapacitated or when he will die. If you don't have a disability plan, you and your property may end up in a court-supervised guardianship or conservatorship proceeding. If you don't have an estate plan, your loved ones won't know what you really wanted. Your property may go to someone you would not have chosen to receive it had you taken the time to make a plan. Be smart. Make an estate plan or update your old and outdated estate plan, to protect you and your loved ones regardless of the large federal estate tax exemptions. 

      NOTE: State and federal laws change frequently and the above information may not reflect the most recent changes. Please consult with an attorney or tax adviser for the most up-to-date advice. The information contained in this article is not intended as tax or legal advice and it is not a substitute for tax or legal advice.

      Continue Reading...