If you are interested in wealth preservation you need to understand the law of the land when it comes to the federal estate tax. Estate planning is a dynamic endeavor like any other type of financial planning. Things change, and you should always be aware of relevant changes when they come down the pike.
With this in mind we would like to pass along some news that has recently been released by the Internal Revenue Service. First, let’s take a look at the estate tax and the unified credit or exclusion from an overview.
Federal Estate Tax Unified Credit
Everyone does not pay the federal estate tax because there is a unified credit or exclusion. Only the amount that you pass on to others that exceeds this amount would be potentially subject to taxation.
What makes the tax unified? The estate tax is not the only tax that can be imposed on asset transfers to others. There is also a federal gift tax. The estate tax and the gift tax are unified.
Therefore, the unified credit is not exclusively devoted to the assets that are being transferred to your heirs after you die. It also applies to gifts that you give while you are living. If you use all of your exclusion giving gifts, nothing would be left to apply to your estate.
Amount of Credit
Throughout this calendar year the amount of the unified credit has been $5.25 million. This came about due to an adjustment for inflation. In 2011 the exclusion was $5 million, and in 2012 it was $5.12 million.
These adjustments are applied annually if they are deemed necessary by the Internal Revenue Service. Since the year is ending, people within the estate planning community were naturally looking forward to an announcement with regard to 2014.
An announcement has in fact been made. There will be another inflation adjustment that will go into effect when 2014 arrives.
In 2014 the amount of the unified gift and estate tax exclusion will be $5.34 million.
When you are evaluating what this means to you as a married taxpayer, you should understand the fact that this $5.34 million exclusion is allotted to you and your spouse as individuals.
As a result, as a couple your total exclusion will be $10.68 million in 2014. And, if you were to die during 2014, your spouse would still have a total exclusion of $10.68 million because the estate tax exclusion is portable between spouses.
Finally, we would like to add the fact that the exclusion or credit is only a factor when you are transferring assets to people other than your spouse. There is an unlimited marital deduction. Because of this, you can give unlimited gifts or bequests to your spouse free of federal transfer taxes.
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.