Federal Estate Taxes in 2012

Following one year of federal estate tax repeal, estate taxes once again became effective on January 1, 2011. For 2012, the federal estate tax exemption, or the amount an individual can pass on his or her death free of federal estate tax, is $5 million for an individual, reduced by certain lifetime gifts, adjusted for inflation. The applicable estate tax rate in effect for 2012 is 35%.

What Happens to the Federal Estate Tax After 2012?

The estate tax law enacted in 2011 is due to “sunset” or expires at the end of 2012, which means that unless Congress and the President agree to a different result, in 2013 the exemption may return to $1 million for an individual, with a maximum estate tax rate of 55%.

Does Alabama Impose an Estate Tax?

Alabama does not impose a separate state estate or inheritance tax. Alabama is what is known as a “pick up” or “sponge” state, which means the state collects the maximum credit allowed on the federal estate tax return for “state death taxes.”

Portability of Unused Estate Tax Exemption

The existing law provides for “portability” of a deceased spouse’s unused estate tax exemption to a surviving spouse (generally limited to $5,000,000). If the first spouse to die does not use all of his or her exemption, because the estate is smaller than the exemption, the “unused” portion of that spouse’s exemption can be used by the surviving spouse with respect to both gift taxes and estate taxes. This may allow some people to adopt a simpler estate plan, while still taking advantage of both spouses’ transfer tax exemptions. Consult your estate planning attorney for further information.

Experienced Alabama Estate Planning Attorney

To learn how your estate may be impacted by federal estate taxes, or to discuss whether you should revise your estate plan in light of recent tax law changes, contact The Hawkins Law Firm in Guntersville, Huntsville, and Arab, Alabama.