For those of you watching Congress as 2012 came to a close and wondering what would happen to the economy if we fell off the dreaded “fiscal cliff,” you may feel as though you lost a lot of sleep over nothing.

Congress did reach a deal in the wee-hours of New Year’s Day and despite several doomsday scenarios, from an estate planning perspective, things stayed pretty consistent. So what did the new deal entail and what does it mean for your ability to plan for the future of your estate?

The Senate bill, H.R.8, passed both houses by a wide-margin and provides for the following:

• The Federal estate tax exclusion, gift tax lifetime exclusion and generation-skipping exemption (“GST exemption”) all remain at $5 million dollars, adjusted for inflation (estimated to result in an exemption of $5.25 million per person and $10.5 million for a married couple).
• Estate and gift tax rates increase from 35 percent to 40 percent.
• The unlimited marital deduction is extended, meaning that spouses who inherit from one another will not pay a tax on the death of the first spouse (assuming both spouses are U.S. citizens).
• Portability between spouses is also extended, which allows a surviving spouse to elect to add any unused exclusion from their deceased spouse to their own exclusion amount. This enables a married couple to transfer up to $10.5 million dollars, tax-free. It is important however to note that portability is not automatic and must be elected. To preserve a right to the portability election, an estate tax return must be filed at the time the first spouse dies, even if no tax is owed.
• Annual gift exclusions increase from $13,000 to $14,000 per individual gift recipient or “donee.”

Planning has been challenging in recent years, with the looming deadline of extending the prior year’s tax cuts and increasing uncertainty as to the future of the estate tax in 2013 and beyond. The passage of this bill quiets those concerns, making the new tax rates and exemptions permanent. If Congress wasn’t able to reach this deal, tax rates would have spiked to 55 percent and the exemption for Federal Estate and Gift Tax would have dipped back to 2001 levels at just $1 million per individual.