You may naturally assume that you can leave assets to your loved ones free of taxation. After all, you paid many different taxes throughout your life. However, whether it is fair or not, there are taxes on large asset transfers in the United States.
We have a federal estate tax, and it carries a maximum rate of 40 percent at the present time. The estate tax exclusion is $5.34 million for the rest of 2014. This is the amount that is exempt from taxation. The portion of your estate that exceeds this amount is potentially exposed to the federal estate tax.
In addition to the federal estate tax, there is also a federal gift tax. The gift tax was enacted to stop people from giving lifetime gifts to sidestep the estate tax. The gift tax and the estate tax are unified. They carry the same 40 percent top rate, and the $5.34 million exclusion is a unified lifetime exclusion.
This exclusion encompasses gifts that you give along with the estate that you are passing along to your heirs. To clarify by way of example, if you gave $5.34 million in tax-free lifetime gifts, there would be nothing left to apply to your estate. Under these circumstances, the entirety of your estate would be subject to the estate tax.
To paint a complete picture, we should touch upon the unlimited marital estate tax deduction. You can transfer unlimited assets to your spouse free of transfer taxes. The exclusion would be used to facilitate tax-free asset transfers to people other than your spouse.
Potential for Changes
If you evaluate your assets and find that you are not exposed to the estate tax, you should not be overconfident. There can indeed be changes to tax laws.
The current estate tax parameters are said to be permanent in the sense that there is no particular expiration date. However, the word “permanent” is not truly accurate, because changes could be implemented via legislative mandate.
Budgets proposed by the White House for the 2013 and 2014 calendar years called for changes to the estate tax exclusion. These changes would have taken effect in 2018 if they were adopted.
Under these proposals, the estate tax rate would go up to 45 percent, and the exclusion would go down to $3.5 million. The proposals also called for a gift tax exclusion of just $1 million.
Things can indeed change. You should always be aware of the estate tax parameters so that you can make adjustments if and when they become necessary.
Consult With a Licensed Attorney
To learn more about the estate tax and other estate planning issues, contact us through this page to request a free consultation: Indianapolis IN Estate Planning Attorneys.
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.