It can come as a surprise to some people when they hear that you can’t just leave assets to your loved ones after you die without a tax being levied. The reason why this is not commonly spoken about is because of the fact that most people pass away with assets that are valued within the exclusion amount.
Federal Estate Tax Exclusion
The federal estate tax exclusion is $5.25 million in 2013. (It can be adjusted for inflation on an annual basis, so next year you may see a slightly larger figure.) As a result, you can pass along as much as $5.25 million free of the estate tax in 2013.
When you are interested in learning about the federal estate tax you should also know a bit about the gift tax. Yes, there is a gift tax in place as well, and it is unified with the estate tax.
In 2013 you can give as much as $14,000 to any number of individuals free of the gift tax because there is an annual $14,000 per person exclusion. If you gave a gift that exceeded $14,000 to a single person you would then start to cut into your $5.25 million exclusion. Because the two taxes are unified, this exclusion encompasses the combination of gifts that you give throughout your life that are taxable and the value of your estate.
You should be aware of the fact that there is an unlimited marital estate tax deduction. What this means is that you can give assets of any value to your spouse either while you are alive or through the terms of your estate plan without incurring any estate tax liability. A caveat to this would be that the unlimited marital deduction only extends to a surviving spouse that is an American citizen.
Another thing to know about the estate tax as a married person is that the exclusion is portable. In this context portability refers to the ability of a surviving spouse to utilize the exclusion that was due to his or her deceased spouse. In 2013 you as a surviving spouse would have a total exclusion of $10.5 million since the individual exclusion is $5.25 million this year.
It is important to understand the fact that these parameters are not etched in stone. They are considered to be permanent in the sense that there is no particular expiration date. However, laws can be changed, and in fact there have already been proposals that would reduce the amount of the exclusion and increase the rate of the tax. On the other side of the coin there are lawmakers who have introduced legislative measures that would repeal the tax altogether.
Because of the potential for changes you would do well to develop an ongoing relationship with your estate planning attorney so that you can adjust your plan if it becomes necessary because of changes to the tax code.
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.