Not only will family and close friends appreciate your continued presence in their lives, but your wallet will benefit as well. The financial elephant in the room continues to be the looming fiscal cliff. Experts believe the effects of the fiscal cliff could be seen in nearly every part of your life (if it is not averted), and it may also affect the financial aspects of your death.

The Tax Rate
When someone passes away, the IRS imposes a tax on the value of his or her assets that he or she planned to transfer to another person or organization. This tax is called the estate tax. Today, the estate tax rate is 35%. This may seem high to some, but after we go over the fiscal cliff, that rate will jump 20 percentage points to 55%.

That's not all. Under current law, taxpayers can exempt up to $5 million of their assets from the estate tax upon their death. The post-fiscal-cliff exemption will fall to $1 million. This may still seem like a reasonable cushion for most Americans, but these exemptions are lifetime exemptions. This means that all estate assets transferred to somebody else over a person's lifetime count towards the maximum.

"Secret" Loopholes
Forbes reports that another indirect consequence of the fiscal cliff may increase a person's estate tax liability. Estate planners have long used loopholes in the tax code to legally shelter assets from the estate tax. The Grantor Retained Annuity Trust (GRAT) is a little known yet popular way to avoid estate taxes. Experts believe that as Congress looks for more revenue to pay for any potential fiscal cliff compromise it will close some of these loopholes. As Forbes states, watch for routine Congressional bills with tax code changes buried within them.

Who Will Be Affected
Americans may be affected if the estate tax lifetime exemption decreases to $1 million from the current $5 million. Currently, only 8,800 estates have to make estate tax filings. If the $1 million exemption becomes law the number could increase to more than 114,000 households. This could result in more than 52,500 people paying estate taxes up from a mere 3,300.

Because each spouse can gift estate assets, the current $5 million exemption could be $10 million for married couples. Post fiscal cliff, the $1 million exemption could be $2 million. Realistically, this makes the estate tax inapplicable to most of Americans. This does not mean it will not affect middle class households. The effect will simply be less direct.

The economy may feel the burn, too. As estate tax laws become more unfavorable, the nation's wealthy will reposition assets to avoid tax liability. This could include moving money away from long-term economy-boosting activities like new businesses or the expansion of existing ones.

Actions to Take
Financial planners are cautioning Americans, whose liquid assets total less than $1 million, that the total value of their estates may be higher than the new limit. While most experts continue to believe Congress will find a way to avert the fiscal cliff, now may be a good time to review your estate and how it is allocated. Draw up or review your will, speak to an insurance professional about your life insurance policy, and speak to your heirs about their roles in the estate planning process.

The Bottom Line
You may be convinced that the estate tax changes will not affect you. According to estate planners, you may be underestimating the total value of your estate. This could be costly if the country in fact does go over the fiscal cliff, and you are not properly prepared.

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