If you are fortunate enough to have a moderate to large estate that you will leave behind when you die you likely want to pass that estate on to your spouse if you are married. Like most people, you are probably also concerned about the tax consequences of gifting your estate assets to someone when you die. By utilizing the unlimited marital deduction you can leave your entire estate assets to your spouse tax-free; however, the long-term tax consequences of taking this approach are often detrimental.
When you die, the value of all gifts made during your lifetime combined with the value of your estate assets at the time of your death will be combined. If the combined total exceeds the lifetime exemption limit the amount in excess of the limit will be subject to gift and estate taxes. Thanks to the American Taxpayer Relief Act of 2013, or ATRA, the lifetime exemption limit was permanently set at $5 million with an annual adjustment for inflation. For 2014 the limit is $5.34 million. If your estate assets exceed the limit you can gift them to your spouse without incurring estate taxes by using the unlimited marital deduction but that often has the unwanted effect of overfunding a spouse’s estate.
For example, if your combined lifetime gifts and estate assets are valued at $10 million your estate would be subject to the payment of estate taxes on $4.66 million ($10 million – $5.34 million). Let’s assume that your spouse has assets valued at an additional $4 million. Leaving your estate assets to your spouse would avoid estate taxes on your estate but would then push your spouse’s estate value considerably over the lifetime exemption limit. At a tax rate of 40 percent, a significant chunk of your estate assets would eventually be lost to gift and estate taxes using this approach.
This is a perfect example of why estate planning is necessary. Without an estate plan your estate could dodge the estate tax bullet but only temporarily. With careful estate planning, however, much – if not all – of those taxable assets could be transferred to loved ones before your death. Using the annual exclusion, for instance, you could shift up to $14,000 a year to as many beneficiaries as you wish tax-free.
Estate Taxes in St. Louis: Legal Advice and Guidance
If you are concerned about the impact of gift and estate taxes on your estate be sure to consult with your estate planning attorney early on before it is too late to take advantage of tax avoidance strategies.