The federal estate tax and the gift tax are significant factors for many individuals. There are misconceptions out there, and as a response we would like to provide the answers to five of the more frequently asked questions about transfer taxes.
1.) How much of my estate will be exempt from the federal estate tax?
At the end of 2010, a piece of legislation was passed that set the estate tax exclusion at $5 million for 2011 with a provision for an adjustment for inflation in 2012. That adjustment brought the exclusion up to $5.12 million. In 2014, that rate is $5.34 million.
After the enactment of the American Taxpayer Relief Act of 2012 this base exclusion was kept in place. In 2013 the exclusion is $5.25 million after another allowance for inflation.
So, this year $5.34 million is excluded or exempt. It may go up a bit next year to account for inflation.
2.) Can I give out inheritances in advance while I am alive to sidestep the estate tax?
You can certainly give gifts while you are alive, but doing so has tax consequences because there is a federal gift tax in place. This tax is unified with the estate tax.
The $5.34 million exclusion is a lifetime unified exclusion. This means that the exclusion applies to the value of the gifts that you have given and the value of the property that comprises your estate.
Giving gifts using this unified exclusion is not going to provide estate tax efficiency because you are using up the exclusion that could be applied to your estate.
3.) If I inherit money from my spouse will the estate tax be levied?
No, there is no estate tax on an inheritance that you receive from your spouse. The gift tax is not applicable on gifts that you receive from your spouse while you are alive either.
And, it is useful to point out the fact that the estate tax exclusion is portable between a husband and wife. If you survive your spouse, his or her exclusion is available to you in addition to your own allotted exclusion.
4.) Would I have to pay the gift tax if I wanted to pay school tuition for my grandchildren?
There is an educational gift tax exemption. Under the tax code you are allowed to pay the school tuition of any number of students equaling any sum of money without incurring any gift tax liability.
However, you should understand the fact that this is only applicable to tuition alone. This exemption does not extend to other expenses, like food and shelter, entertainment, fees, books, etc.
5.) Is there an estate tax on the state level in Ohio?
There was an estate tax on the state level here in Ohio through 2012, but we are happy to report that this tax has been repealed.