We practice law in Indianapolis, and we serve many clients who live in Hamilton County. A while back, Eyewitness News 13 carried a story about the affluence of Hamilton County residents. They cited a Census Bureau study that was conducted to determine the wealthiest counties in the country. Hamilton County came in at number seven.
Clearly, success is what we all strive for, and wealth is a very good thing. At the same time, you also have to take steps to preserve your wealth, because taxation looms large. Let’s look some facts about the federal estate tax so that you can understand the lay of the land.
Death and Taxes
There federal estate tax has been around since 1916, and it can have a significant impact on your legacy. Fortunately, most people do not pay the tax, because there is a relatively high credit or exclusion. However, if you are exposed, you must implement tax efficiency strategies, because this tax carries a very hefty 40 percent maximum rate.
We have a federal estate tax credit or exclusion. This is the amount that you can transfer tax-free before the death tax would kick in. For the rest of 2016, the exact amount of the federal estate tax exclusion is $5.45 million. Each year there are adjustments to account for inflation, so you can expect to see a slightly higher figure year-by-year if the laws do not change.
You would be using a portion of your exclusion to leave a tax-free bequest to anyone other than your spouse. There is an unlimited marital estate tax deduction. This deduction allows you to transfer unlimited assets to your spouse free of taxation, as long as your spouse is a citizen of the United States.
This citizenship requirement tells you something about the value of the marital deduction as an estate planning strategy. The tax man does not extend the marital deduction to non-citizens because a surviving spouse who is a citizen of another country could return to that country with a tax-free inheritance. The IRS would never be in a position to collect anything.
If you are married to an American citizen, and you leave your spouse a large tax-free inheritance, this does not solve the estate tax problem, because your spouse would then be in possession of an estate that could be taxed. Even though there is an unlimited marital deduction, you should discuss tax efficiency strategies with a licensed estate planning attorney if you face exposure.
Getting back to a non-citizen spouse, there is an estate tax efficiency strategy that can be implemented if you are married to a citizen of another country. It would be possible to make your spouse the beneficiary of a qualified domestic trust. Your spouse could receive income from the trust’s earnings throughout his or her life, and these distributions would not be subject to the estate tax.
Estate Tax Exclusion Portability
Since 2011, the estate tax exclusion has been portable between spouses. In an estate planning context, the term portability is used to describe the ability of a surviving spouse to use the estate tax exclusion that was allotted to his or her deceased spouse. Using the figure that is in place during the current calendar year, a surviving spouse would have a total exclusion of $10.9 million.
However, portability is not automatically granted by the Internal Revenue Service. You have to opt for portability, and this is done through the filing of IRS Form 706. The form must be submitted within nine months of the passing of the decedent in question, but you can ask the IRS to grant you an extension if you need one.
Federal Gift Tax
In addition to the federal estate tax, there is also a federal gift tax. This tax exists to stop people from giving lifetime gifts in an effort to avoid the death tax. We touched upon the $5.45 million exclusion previously. The exclusion is a unified exclusion, because the estate tax and the gift tax are unified. It applies to gifts that you give while you are living along with the estate that you are passing along to your heirs.
The unlimited marital deduction also applies to lifetime gift giving. You can give your citizen spouse any amount of money and/or property while you are alive free of the gift tax.
Schedule a Consultation
There are steps that you can take to preserve your wealth if you are exposed to federal transfer taxes. To explore your options, call us at (317) 684-1100 or send us a message through our contact page to schedule a consultation.