It is important to understand the law of the land when it comes to the federal estate tax when you are planning your estate. Assets that you intend to transfer to your heirs are potentially subject to taxation. However, there is a federal estate tax credit or exclusion. Your estate would not be subject to the death levy if its value does not exceed the amount of the exclusion.
The federal estate tax exclusion was set at $5 million for 2011, and there have been ongoing adjustments to account for inflation ever since. During the current calendar year the amount of the federal estate tax exclusion is $5.34 million.
There is also a federal gift tax in place that is unified with the estate tax. The $5.34 million exclusion that we have in 2014 applies to gifts that you give while you are living along with the estate that you will be transferring to your heirs after your passing.
The maximum rate of the gift tax and the estate tax is 40 percent.
Some of the states in the union impose state-level estate taxes. Our firm practices law in the state of Indiana. Here in Indiana, there is no state-level estate tax.
Estate Tax Exclusion Portability
Now that we have provided the necessary background information about the estate tax, we can answer the question that serves as the title of this post.
The $5.34 million exclusion of which we speak is afforded to each individual taxpayer. As a result, if you are married, you have a $5.34 million exclusion, and your spouse has his or her own $5.34 million lifetime exclusion. When you combine the two, you have a total of $10.68 million as a couple in 2014.
In an estate planning context, portability describes the right of a surviving spouse to utilize the exclusion that was afforded to his or her deceased spouse. Prior to 2011, your estate tax exclusion died when you did. Your surviving spouse would not be able to use your estate tax exclusion. The estate tax exclusion was not portable between spouses.
A piece of legislation called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made the exclusion portable in 2011 and 2012. The American Taxpayer Relief Act of 2012 made the portability of the federal estate tax exclusion permanent.
However, the word permanent should not be taken literally. It is permanent in the sense that there is no particular expiration date pending. At the same time, changes to tax laws are always possible. This is one of the reasons why it is wise to develop an ongoing relationship with an estate planning attorney who can always keep you abreast of the current state of affairs.
If you would like to discuss death taxes or any other issue with a licensed estate planning attorney, contact us to request a free consultation.
Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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