People who are in possession of significant wealth need to be concerned about the federal estate tax.
You may think that your family will be set for generations if you have been fortunate enough to accumulate many millions of dollars. However, because of the existence of the estate tax your financial legacy could be continually eroded generation after generation.
In 2014, the precise amount of the federal estate tax exclusion is $5.34 million. Each year this figure can be adjusted slightly to account for inflation. The maximum rate of the estate tax is 40%.
You can’t talk about the estate tax without also delving into the subject of the federal gift tax because it is unified with the estate tax and it carries the same 40% top rate. This $5.34 million exclusion applies to taxable gifts that you give throughout your life as well.
To be clear, we’re not talking about two separate $5.34 million exclusions. There is one unified exclusion. If you gave $5.34 million in tax-free gifts using your lifetime unified exclusion nothing would be left to apply to your estate after you die.
This exclusion is allotted to each person. Therefore, if you are married you and your spouse have a total exclusion of $10.68 million between you. When a married person dies, the survivor can use the exclusion that his or her deceased spouse was entitled.
While we’re on the topic of the estate tax and spouses you should understand the fact that there is an unlimited marital deduction. You can give gifts to your spouse while you are living totaling any amount of money free of the gift tax. And, you can bequeath any amount of money to your spouse free of the estate tax.
It should be noted that the above is true only if your spouse is an American citizen. The unlimited marital deduction is not available to a surviving spouse who is not an American citizen.
The present exclusion and maximum rate are said to be “permanent.” They are permanent in the sense that there is no particular expiration date. Prior to this year the estate tax parameters were temporary because they were put into place via legislative measures that did indeed have sunset dates.
This does not mean that you should forevermore forget about the subject of the estate tax if the value of your assets does not exceed $5.34 million. New legislation could pass that changes the parameters. In fact, a recent White House budget proposal included an increase in the estate tax rate and a reduction in the exclusion that would spring into effect in a few years.
Wealth preservation is a serious matter when you consider the rate of the estate tax. If you have concerns feel free to contact our firm to schedule a consultation.