Estate taxes: Some good news for a change
March 13, 2013
This January, as part of the "fiscal cliff" tax compromise, Congress brought stability to the ever-shifting estate tax landscape by enacting a permanent set of tax rates and exemptions. As a result, the vast majority of Americans no longer need to worry about federal estate taxes when they leave assets to their loved ones.
The new law sets the amount of money you may give to your heirs free of federal estate tax at $5.25 million (generally up to $10.5 million for married couples), to be adjusted for inflation in the future. The law also set the top estate tax rate at 40%. Because the federal gift and estate tax structures are "unified," using the gift tax exemption during your lifetime will reduce—virtually dollar for dollar—your available estate tax exemption upon your death. Despite this reduction, a lifetime gift-giving program could provide meaningful estate tax savings to a family.
Vanguard can help
No matter how large or small your assets, an estate plan can make sure your wishes are carried out and help ensure your legacy.
Generally speaking, a surviving spouse can take advantage of any unused portion of the estate tax exemption of his or her predeceased spouse. Assuming the law's requirements are met, this "portability" can allow married couples to exempt up to $10.5 million from estate and gift taxes.
Had Congress not acted, the estate and gift tax exemptions would have reverted to $1 million—a level not seen in a decade. Such a change would have affected a great many American families who hadn't been subject to these taxes in the past.
Keep estate planning on your to-do list
If you think these changes mean you can check estate planning off your to-do list, think again.
With the tax laws settled, this could be a good time to review your will and your overall estate plan. If you're considering making a significant gift to your family during your lifetime, you'll want to take into account your age, personal financial and philanthropic goals, the size of your estate, and your spending needs, among other factors.
Even if you don't need to shelter assets from estate taxes, you can protect your family from potential harm—and heartache—by taking care of three important tasks:
- Make sure the beneficiaries you've chosen for your retirement plans, annuities, and life insurance policies are up to date.
- If you have minor children, choose guardians to raise them and trustees to manage their financial affairs in the event of your death. And make sure those individuals are identified in your will and other estate planning documents.
- Carry enough life and disability insurance to meet the needs of your dependents.
"Even though the estate tax exemption amounts have been frozen at a historically high level, it's important for all of us to review our estate plans from time to time, especially when there's a change in tax laws," said Alisa Shin, senior wealth planner for Vanguard Asset Management Services™.
"Your estate plan is not just about tax savings. It's also about making sure your assets are being distributed in the way you intend," Ms. Shin said.
- The information in this article should not be construed as tax advice. We recommend you consult a professional tax advisor for specific guidance on your situation.
- Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.