Will the “fiscal cliff” affect my estate plan?

The answer, not surprisingly, is it depends.

The “fiscal cliff” refers to the tax increases and spending cuts that will automatically go into effect in January 1, 2013, if Congress does nothing to stop it. One of the taxes that will increase is the federal estate tax, the tax paid from the estate of someone who has died. Not only will the estate tax rate go up from 35% to 55%, but the “exemption equivalent” or tax-free amount allowed for each individual will decrease from $5 million to $1 million. This has huge implications for those who pay this tax. 

Much of my estate planning practice involves planning to minimize the estate tax for my clients by the use of trusts. The trusts are created either before or after death. If the “fiscal cliff” tax increases take effect, it can have unintended consequences in Wills and trusts that were carefully planned around the previous exemption equivalent. The reason is that much of the standard tax planning for a married couple revolves around a formula based on the federal exemption equivalent. If the exemption equivalent changes, the entire plan may need to be re-examined.

In a typical estate plan for a married couple, one trust is created for the benefit of the surviving spouse and children, and one trust is created to benefit the surviving spouse alone. It is important for the trusts to be funded in a manner that gives the surviving spouse sufficient asset to meet his or her needs. If the funding is done incorrectly, the children may end up receiving too much and the surviving spouse receiving too little.

While this concern will not apply to everyone, if you are lucky enough to have an estate that requires planning to minimize estate taxes, and if the fiscal cliff tax cuts go into effect in January, you may be affected. You should have your estate planning documents reviewed to see if changes are needed to give your family the financial protection intended.


  1. […] total of $10 million from federal estate taxes. Amounts over the exemption are taxed at 35%. If the fiscal cliff changes take effect, individuals who die on January 1, 2013 and later will have an exemption equivalent of only $1 […]

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