Avoiding federal gift and estate taxes is a common estate planning goal. To successfully decrease your estate’s exposure to taxes you need to understand current tax laws and incorporate those laws into your overall asset protection strategies within your estate plan. With that in mind, the Indianapolis estate planning attorneys at Frank & Kraft explain what happens to your estate assets if you die intestate in Indiana.
Federal Gift and Estate Taxes
For anyone who hopes to pass down assets to future generations, a basic knowledge of federal (and sometimes state) gift and estate taxes is essential. When you die, you will leave behind an estate made up of tangible and intangible assets. The value of that estate combined with the value of any qualifying gifts you made during your lifetime is subject to federal gift and estate taxes at the rate of 40 percent.
The Lifetime Exemption
You undoubtedly want to avoid losing 40 percent of your estate to taxes. Fortunately, each taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed. The American Taxpayer Relief Act of 2012 (ATRA) set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, tax legislation was signed into law that increased the lifetime exemption amount for 2018 and for several years thereafter. On January 1, 2026, the exemption amounts are scheduled to revert to the previous $5 million exemption adjusted for inflation.
For 2023, the individual lifetime exemption amount is set to increase to $12.92 million, an increase of almost $900,000. A married couple can shield a total of $25.84 million from federal gift and estate taxes, representing an increase of $1.72 million. To put those figures in perspective, the increase prevents the loss to Uncle Sam of $344,000 worth of assets for an individual and $688,000 for a married couple.
Annual Gift Tax Exclusion
While the lifetime exemption looks at the cumulative value of all gifts made during your lifetime and/or at the time of your death, there is another extremely useful tax avoidance tool that can be used each year. The annual gift tax exclusion allows each taxpayer to make tax-free gifts to an unlimited number of beneficiaries each year. The value of these gifts does not count against your lifetime exemption. For 2023, the annual gift tax exclusion limit will increase from $16,000 to $17,000 for individuals. Married couples may use the gift-splitting option to combine their exclusions and gift assets valued at up to $34,000. By way of illustration, assume that you are married with four adult children and six grandchildren. You and your spouse could gift each child and grandchild up to $34,000 worth of assets each year – tax-free. That’s $340,000 in assets that can be passed down in a single year without being subject to federal gift and estate taxes. Over the course of ten years, you could transfer $3.4 million without using any of your lifetime exemption.
Gifts to a Non-Citizen Spouse
If both spouses in a married couple are United States citizens, one spouse may make unlimited gifts to the other spouse, during life or at the time of death, using the unlimited marital deduction. The unlimited marital deduction, however, does not apply to gifts made to a non-citizen spouse. The rationale behind this is that allowing tax-free transfers to a U.S. citizen spouse only defers the taxes due on the assets. When the surviving spouse dies, the remaining assets will be subject to taxation; however, if the surviving spouse is not a U.S. citizen, those assets may avoid taxation.
For 2023, the first $175,000 of gifts to a non-citizen spouse are not included in the total amount of taxable gifts. This marks an $11,000 increase from the 2022 limit.
Contact Indianapolis Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about federal gift and estate taxes, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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.
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