Wealth preservation involves the deployment of estate tax strategies. To determine whether or not your wealth is potentially subject to the estate tax before it is passed on to your heirs you should be aware of the federal estate tax exclusion.
For the rest of this year the estate tax exclusion is $5.25 million. The maximum rate of the federal estate tax is 40% under the provisions of the American Taxpayer Relief Act of 2012. (Ironically, prior to this “relief” the maximum rate was 35%.)
Under existing laws the estate tax exclusion can be adjusted annually for inflation if such an adjustment is warranted. As a result you may see a slightly different estate tax exclusion amount in 2014 and in subsequent years assuming existing laws remain in place.
In addition to the federal estate tax we have a federal gift tax. It carries the same top rate, and it is unified with the estate tax. As a result, the $5.25 million exclusion is a unified exclusion. It applies to taxable gifts and your estate’s value. For this reason giving gifts using this exclusion throughout your life is going to reduce the estate tax exemption at death, so you have to determine which is the best approach for you.
The good news is that there is an annual per person gift tax exclusion that exists separate from the lifetime unified exclusion. The exact amount of this exclusion does not necessarily remain constant every year, but in 2013 the amount of this annual per person exclusion is $14,000.
As a result, if you wanted to write a $14,000 check and give it to your son this transaction would not be taxable, and your lifetime unified exclusion would not be reduced by the value of the gift.
This is an exclusion that is afforded to each taxpayer. So, a married couple could give as much as $28,000 to any number of gift recipients this year free of taxation. If you had several children, friends or others to whom you wish to make gifts, you could transfer quite a bit of money tax-free, and you could also give tax-free gifts to their spouses using this annual exclusion.
The estate tax exclusion is portable. This means that the surviving spouse could use the unused portion of the exclusion that his or her deceased spouse was entitled to.
When you’re planning your estate you should be aware of the fact that there is an unlimited marital deduction. You can give your spouse any amount of money while you are living free of the gift tax. Your spouse can also inherit any amount of money from you without incurring any estate tax exposure.
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