Reviewing an Estate Plan for Changes in the Tax Law

As 2011 comes to an end and 2012 quickly approaches, individuals may review their estate plan or gifting strategies to ensure that they will not be adversely affected by changes in the estate and gift tax laws. 

When reviewing the estate and gift tax laws, it is important to consider not only the federal estate and gift tax, but also the estate tax for the State of Ohio. 

The following provides a summary of the current federal and Ohio estate and gift tax laws for 2011 and 2012, and provides changes that are scheduled to occur.

Current Federal Estate and Gift Tax Law / Scheduled Changes

• Under federal law for 2011 and 2012, the gift tax rate and the maximum estate tax rate is 35%.
• Under federal law for 2011 and 2012, an individual can give an unlimited amount to their spouse, if their spouse is a U.S. citizen, and to charities without paying estate and gift taxes.
• Under federal law for 2011 and 2012, the annual gift tax exclusion amount is $13,000, which allows an individual to make $13,000 gifts to individuals without gift tax consequences.  This is a per recipient exclusion amount.  A married couple can make gifts of $26,000 to individuals if both elect to take part in the gift, which is known as gift splitting.  Any amount gifted to an individual that is above the annual exclusion amount reduces the unified credit amount, discussed below.  As an example, a parent could make a $13,000 gift to each of his/her children in 2011 and again in 2012 without gift tax consequences.  A married couple could make gifts of $26,000 to each of their children in 2011 and again in 2012 without gift tax consequences if they elect to gift split. 
• Under federal law, the unified credit for estate and gift tax purposes is $5,000,000 for 2011 and for 2012, adjusted for inflation.  If an individual gives money or property to someone other than their spouse who is a U.S. citizen or a charity, such as their children, the amount that they give would be subject to the $5 million exemption.  This amount applies to lifetime gifts and also to bequests made at their death.  The $5 million exemption also applies to transfers made which could be subject to the generation skipping transfer tax.   
• Federal law for 2011 and 2012 provides a “portability” feature for the $5 million unified credit amount for surviving spouses.  The exemption amount was at one time a “use it or lose it” amount, meaning if a spouse did not use their exemption amount, it was lost.  However, if a spouse passes away in 2011 or 2012, an election can be made to allow the surviving spouse to use any unused portion of the deceased spouse’s unified credit amount.  The portability feature does not apply to transfers that would be subject to the generation skipping transfer tax.  For example, if a deceased spouse used only $3 million of their $5 million credit amount and passed away in 2011 or in 2012, with a proper election, the surviving spouse could use the remaining $2 million of the deceased spouses unified credit amount in addition to their own $5,000,000 amount, for a total exclusion amount of $7,000,000.

For federal estate and gift tax purposes, the current laws are scheduled to sunset on December 31, 2012.  Unless Congress takes action prior to the sunset of the current laws, the following changes are scheduled to occur in 2013:

• The federal gift tax and maximum estate tax is scheduled to increase to 55%.
• The $5 million federal credit amount is scheduled to revert back to $1 million for estate, gift and generation skipping tax purposes.
• The “portability” feature will expire and the law will revert back to a “use it or lose it” scenario.

Current State of Ohio Estate Tax Law / Scheduled Change

The State of Ohio has a much lower estate tax exclusion amount.  The estate tax exclusion amount for 2011 and for 2012 is $338,333. 

Any estates that are transferred to someone other than a spouse or a charity above this exclusion amount are subject to an estate tax from Ohio.  For 2011 and 2012, the Ohio estate tax is 6% for estates less than $500,000 and 7% for any amounts over $500,000.

There is a significant change to the State of Ohio estate tax law as the estate tax has been repealed beginning January 1, 2013.  This means any persons who pass away beginning in 2013 will not be subject to an Ohio estate tax.

Given the changes that have occurred and that are scheduled to occur, reviewing an estate plan is essential to ensuring that your wishes are satisfied and are consistent with changes to the tax laws.

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George P. Millich Jr. is an attorney in Youngstown, Ohio. His practice areas include estate planning, probate administration, tax law and business succession planning.