There is a federal estate tax in the United States, and theoretically it is applicable to everyone. However, most people don’t pay the estate tax because there is a federal estate tax exclusion.
In 2013, the amount of this exclusion is $5.25 million. After the enactment of the American Taxpayer Relief Act of 2012, this exclusion amount is said to be permanent, but there are inflation adjustments applied annually.
Therefore, you can expect to see an exclusion that is a little bit higher in 2014.
The maximum rate of the federal estate tax is 40 percent.
If your assets do not exceed this amount, your estate is excluded from the federal death tax. If your assets do in fact exceed this amount, you should speak with an Indianapolis estate planning attorney about estate tax efficiency strategies.
Unification of Gift and Estate Taxes
The estate tax is not the only tax on asset transfers in the United States. There is also a federal gift tax. This tax is unified with the estate tax.
When you are looking at this $5.25 million exclusion figure, you should understand the fact that it applies to taxable gifts that give throughout your life in addition to the value of your estate as it is being passed on to your heirs.
Should you use your unified exclusion to give gifts to people on your inheritance list while you are still alive? This is a rather multifaceted question, and there is no one universal answer.
One thing that you should know is that the first $14,000 that you give to any one individual during a given year is not subject to gift taxation. You would not be reducing the amount of your available unified exclusion if you give this amount to someone during a calendar year. And, to clarify, you can give this amount to an unlimited number of gift recipients tax-free.
If your estate is in taxable territory, you should certainly consider using this annual exclusion that exists outside of the unified exclusion to give tax-free gifts while you are living.
You don’t have to give direct gifts. People will often utilize this exclusion to fund certain types of irrevocable trusts. It can also be used to give gifts of shares in family limited partnerships tax-free.
The question of giving gifts using your unified lifetime exclusion is a query that can only be answered by a licensed estate planning attorney once all the facts are on the table.
That having been stated, this course of action would certainly be something to seriously consider if the existing exclusion amount was going to be reduced. The White House has floated a 2014 budget that would include a reduction in the unified exclusion that would become active in 2018.
Under these circumstances, the utilization of your lifetime exclusion while you are still living may be the prudent course of action.