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Fiscal cliff legislation may impact estate plans

Readers in West Palm Beach who tuned into a recent discussion about important financial planning steps for the New Year may also be interested in learning about some of the estate planning implications of the fiscal cliff legislation that got hammered out on New Year's Day. The potential impact of the bill's provisions on future estate tax liabilities demonstrates the importance of understanding how changes in federal law can change how you wish to distribute assets and property to your heirs.

As part of the new bill, the legislature decided to permanently extend a particular gift tax provision that was set to expire in 2013 at the end of its original two-year term. When it passed in 2011, the provision changed the way tax exemptions are passed onto spouses who survive their deceased partners.

The law allows a widow or widower to claim the remainder their first deceased spouse's lifetime gift tax exemption, in addition to their own exemption. The opportunity to combine the two exemptions is referred to as "portability."

Portability means that if the first spouse to pass away has used only $1 million of the individual $5.25 million tax exemption, the estate of the second spouse can add the remainder of the exemption to that spouse's gift tax exemption. In this example, a widow who had retained the full amount of the exemption could gift a total of $9.5 million without having to worry about future estate taxes that might approach 40 percent on excess gift amounts.

Prior to the portability rule, estate planning professionals commonly used a type of trust known as a bypass trust to achieve essentially the same effect. The portability rule, as long as it is not repealed by future legislation, makes it unnecessary to use this kind trust to maximize what is passed along to a couple's beneficiaries. Floridians who currently have a bypass trust in their estate plan may want to consult an estate planning attorney to find out if they have options that will better suit their heirs.

Source: Forbes, "A Married Couple's Guide To Estate Planning," Deborah L. Jacobs, Jan. 9, 2013

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