When you are engaged in the process of estate planning you should inventory your assets for a number of different reasons. One of these would be to determine whether or not you have any federal estate tax liability.
The dividing line that you are looking for is $5.34 million. This is the amount of the federal estate tax exclusion at the current time. If your assets do not exceed this amount you do not have any federal estate tax exposure. Anything that you want to transfer to your heirs that exceeds this amount is potentially subject to a federal death levy that carries a 40 percent maximum rate.
Unlimited Marital Estate Tax Deduction
When you are deciding how you want to use your $5.34 million federal estate tax exclusion, you will probably be happy to hear that you don’t have to use any of it to leave assets to your spouse if you’re married. That’s right, there is no limit to the amount of money that you can leave to your spouse tax-free because there is an unlimited marital estate tax deduction.
You do have to be married to someone who is an American citizen to take advantage of the unlimited marital estate tax deduction. The logic behind this involves the government wanting to get its slice of the pie eventually. Allowing for an unlimited marital deduction doesn’t really disturb the tax man. This is because the surviving spouse is still going to be facing federal estate tax exposure if he or she was to receive a tax-free inheritance from his or her deceased spouse.
However, imagine what could happen if the unlimited marital federal estate tax deduction was afforded to a spouse who was not a citizen of the United States. Let’s say that a non-citizen receives a large inheritance from his or her spouse. This individual could simply move back to his or her country of citizenship. The United States Internal Revenue Service will then be left out in the cold when this person eventually passes away in this foreign country.
Another thing to understand when you are determining where you stand with regard to the estate tax as a married person is the portability of the federal estate tax exclusion. If you are a surviving spouse, you can use your exclusion and the exclusion that was allotted to your deceased spouse. Given the $5.34 million that is in place this year, portability would provide a surviving spouse with a total exclusion of $10.68 million.
Lastly, there is a gift tax in place that is unified with the estate tax. It carries the same 40 percent maximum rate. The unlimited marital deduction also extends to gifts that you give to your spouse while you are living.