Many people are wondering what happened to the estate and gift tax laws as a result of the last minute law passed by Congress. For the most part, they continued the status quo.

This is a huge boon for wealthy individuals. If Congress had not acted, the estate tax exclusion amount would have dropped from $5.12 million per person in 2012 to $1 million per person in 2013, with the tax rate going up to 55%. While Congress left the $5.12 million exclusion alone for now, they did raise the top rate from 35% to 40%.

Here are the answers to some other common questions:

Who will have to pay estate tax? Everybody gets a certain sum of money excluded from their estate from taxation. This is called the basic exclusion amount. Currently, the exclusion amount is at $5 million, adjusted for inflation to $5.12 million for 2012. So, this means that any person who leaves an estate worth more than $5.12 will have to pay taxes on any amount over $5.12 million. (This amount may change a bit to adjust for 2013 inflation levels.)

Does a surviving spouse have to pay estate tax on the amount they inherit from their deceased spouse? No. This is the same as it was under the prior law. U.S. tax law allows a deduction, called the marital deduction, that postpones the tax payment on a married couple’s assets until the second spouse dies. However, the marital deduction can only be used when the inheriting spouse is a U.S. citizen.

How much money can the second spouse to die pass tax-free? Under the prior law, which has now been made permanent, a surviving spouse can add any of the deceased spouse’s unused exclusion to their own. This allows a couple to transfer up to $10.24 million tax free. Estate planning and tax attorneys call this portability.

However, portability is not necessarily automatic. Certain things must be done in order to claim the deceased spouse’s exclusion. The person handling the deceased spouse’s estate (probably the personal representative or successor trustee) must transfer the unused exclusion to the surviving spouse. To do this, an estate tax return must be filed when the first spouse dies, even if no taxes are owed. The return must be filed within nine months of the first spouse’s death, with a six month extension allowed. If the deadline is missed, the surviving spouse loses the right to portability. If it is done correctly, the surviving spouse can use the deceased spouse’s unused exclusion to make gifts during his or her lifetime or use to pass assets as part of their estate. Even if your estate is not taxable under current law, it’s a good idea to file the estate tax return anyway after one spouse passes since no one can predict what Congress will do in the future.

What about gifts made during life? The estate tax exclusion amount and lifetime gift tax exclusion amount are combined into one total amount – currently $5.12 million per person. This exclusion (called the “unified credit”) can be used to transfer assets either during life or after death, or a combination of both. Any assets that are transferred over the exclusion amount will be taxed at 40%. Couples can also share their individual exclusion amounts while they are alive to transfer more to their children now without paying taxes, but it will reduce the exclusion amount for assets to be passed tax free after death.

Do all gifts count towards the gift tax? No. Anybody can give another person $14,000 per year without it reducing their lifetime gift tax exemption. This can be combined by spouses for a total of $28,000 per year that a couple could give to any one person tax free without reducing their lifetime gift tax exemption. This is called the annual exclusion, not to be confused with the lifetime exclusion.

In summary, it looks like 2013 will be another great year to get your estate plan in place (or redone if you haven’t looked at it in a while). Call Arizona estate planning attorney at (480) 699-7992 to get started today.