It is certainly a good feeling to know that you will be able to pass along a robust legacy to your loved ones. However, if you’re in this position you may be faced with the need to gain estate tax efficiency. Right now the estate tax exclusion stands at $5 million, and the maximum rate of this federal levy is 35%. However, this does not mean that you need not concern yourself with the estate tax if your estate is worth less than this $5 million threshold.
Late last year a tax relief measure was passed that put the above parameters in place. This act is scheduled to sunset at the end of 2012. At that time the estate tax exclusion will be reduced to $1 million, and the rate of the tax is scheduled to skyrocket to 55%. Of course it is possible that a new piece of legislation may be passed in the meantime that changes things.
But if you are paying attention to the give-and-take going on in Washington with regard to the federal budget, there’s a lot of talk about raising revenue, and it would be logical to suggest that estate tax relief may not be high on the agenda of many.
So if you are exposed to the estate tax you would do well to take steps to gain estate tax efficiency. Giving tax-free gifts is one way to reduce the value of your estate for estate tax purposes, and in the process you transfer assets to those who would otherwise be inheriting them free of taxation.
There is a gift tax in place the carries the same rate as the estate tax, but there is an exemption that allows for gifts of up to $13,000 per year to any number of recipients free of the gift tax. If you were to use this wisely over a period of time you could gain some estate tax efficiency while gaining the added enjoyment of being able to see your loved ones enjoy some of their inheritances while you are still alive.