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01/17/13 It's The Law: Estate Tax Exclusions Extended

It's The Law

Estate Tax Exclusions Extended



I heard that the $5 million estate tax exclusion was being cut to $1 million the first of the year. Did that happen?


A lot of estate planning (tax planning) activity took place in last part of 2012. The wealthy were particularly concerned that the $5 million estate tax exclusion would expire and be replaced, as scheduled by statute, with a $1 million exclusion. But, as everyone knows, Congress passed the American Taxpayer Relief Act of 2012 at the eleventh hour. In part, that Act extended the larger exclusion.

Although passage of any tax bill to avoid the fiscal cliff was questionable, many pundits believed the $5 million estate tax exclusion would be extended as part of any legislation addressing the fiscal cliff. That belief was based on the fact that it was a Democratic controlled Congress that first blessed a $5 million estate tax exclusion and, at the same time, increased the lifetime gift tax exclusion from $1 million to $5 million as well in 2011. It appears the $5 million exclusion has bipartisan support.

The exclusion is indexed for inflation. On January 11, 2013, the IRS announced that after adjustment for inflation the exclusion amount is now $5.25 million. The exclusion applies to transfers at death to persons other than a surviving spouse. As for gifts between spouses , there is an unlimited exclusion. Historically, the tax laws have allowed tax-free transfers between spouses. The IRS hopes that the transfer will load up the surviving spouse's estate to the point that it will be taxed at death of the surviving spouse.

The extended exclusion also continues the "portability" of estate tax exclusions between spouses. Prior to 2011, if the first spouse to die did not use all of his or her exclusion amount by gifts at death to beneficiaries other than a surviving spouse, the unused portion was lost.

Portability has a catch. An estate tax return must be filed for the first spouse to die, even if no tax is due or portability is lost. This is often a trap for the unwary. The tax code only requires an estate tax return be filed if a tax is due. In many estates, as when the first spouse to die leaves everything to the surviving spouse, there is no tax due and no return filed. That means the surviving spouse's estate cannot use any portion of the exclusion left over from the estate of the first spouse to die and, in 2013, means the surviving spouse only has a $5.25 million exclusion, instead of $10.5 million.

Gift taxes in this area can get even more confusing. The lifetime gift tax exclusion equals the estate tax exclusion, but it is a combined exclusion. Gifts during life are not taxable up to $5.25 million. A gift tax return is to be filed for any gift over $14,000.00, but no tax is due until the total of lifetime gifts exceeds $5.25 million. To the extent a taxpayer utilizes the lifetime exclusion, the exclusion for estate tax is reduced dollar for dollar. The Act continues an exclusion of gifts up to $14,000.00, which are not taxable and do not count toward the lifetime gift and estate tax exclusions.

The extension of the estate tax exclusion provides significant opportunities for tax planning and saving. But, as in all complex legal matters, good legal advice will be important.

By: William G. Morris, Esquire

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Questions for this column can be sent to: William G. Morris, e-mail: wgmorrislaw@embarqmail.com or by fax, (239) 642-0722 or

The Marco Island Eagle

Other articles of interest can be viewed at our website, www.wgmorris.com.

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