The ‘Fiscal Cliff’ Deal Brings Changes to Estate Taxes and IRAs

Congress finally came to an agreement to avoid the “fiscal cliff.”
This agreement includes changes to federal estate taxes as well
as Individual Retirement Accounts (IRAs). The American
Taxpayer Relief Act sets a “permanent” estate tax rate. This Act
also provides a tax break for cash donated to charities from an IRA.

The new law makes minor changes to the federal estate tax. The amount
that you can transfer tax-free either during life or at death will remain
the same as it has the past two years. The law permanently sets the
estate tax exemption at $5 million for an individual and $10 million
for a couple indexed for inflation. As a result of the inflationary increase,
the current exemption is $5.25 million.

Therefore, the lifetime gift tax exclusion, meaning the amount you can
give away without incurring a tax, remains the same at $5 million
(also increased for inflation, presently $5.25 million). However, you are
still able to gift up to $14,000 each per year to other individuals without
counting against the lifetime limit.

Under the new law, the gift and estate tax rate will increase from 35 percent
to 40 percent. This means that if you transfer more than life and death unified
credit either during your life or upon your death, your estate in excess of the
remaining credit will be taxed at 40 percent. The new law also makes
permanent the “portability” provision currently in place. Portability allows
married couples to transfer exemptions to one another upon the death of a
spouse. Therefore, the transfer would consist of the exemption of the deceased
spouse to the surviving spouse. As a result, the surviving spouse would have
his or her own exemption plus the deceased spouses’ unused exemption. It is
very important to note that portability is not automatic. Therefore, upon the
death of a spouse it is important to contact an estate attorney to discuss what
needs to be done in order to take advantage of portability.

Even though the new estate tax rates and rules are considered to be “permanent,”
Congress and the President do have the power to review and change the law if
deemed necessary. It is also important to keep in mind that the new American
Taxpayer Relief Act refers to federal estate tax. Additionally, Pennsylvania has
different inheritance tax laws which need to be applied and followed.

Lastly, the fiscal cliff deal also reinstates a tax provision called the IRA charitable
rollover that had expired in 2011. The law extends the provision through 2013.
This allows investors aged 70 ½ or older to transfer as much as $100,000 a year
from an IRA directly to a charity without withdrawing it as taxable income. Non-Roth
IRA owners are required to take yearly minimum distributions from their IRAs
starting at age 70 ½. The charitable donation can count toward the taxpayer’s
minimum required distribution for the year.

For more information regarding changes to estate taxes, please contact
Douglas L. Kaune, esquire at 610 933 8069 or email me at
dkaune@utbf.com. Unruh, Turner, Burke & Frees, P.C.
is a full service law firm which has three convenient office locations

in PhoenixvilleWest Chester and Malvern, Pennsylvania.  The firm
primarily services clients in Chester, Montgomery, Delaware, Philadelphia,
Bucks and Berks Counties, but can represent clients throughout Pennsylvania.