You work hard for your money, and you pay taxes along the way. Most people would assume that they could leave what is left to their loved ones tax-free, but unfortunately, this is not the case for some successful people.
The death tax can take a heavy toll on your financial legacy. It carries a maximum rate of 40 percent, so we are talking about a very significant chunk of your wealth.
Federal Estate Tax Exclusion
Fortunately, there is a federal estate tax exclusion that is relatively high. The credit or exclusion is the amount that you can transfer free of taxation.
We should point out the fact that there is an unlimited marital deduction. You can transfer any amount of money and/or property to your spouse tax-free, but transfers to others are potentially subject to taxation.
However, to utilize the unlimited marital deduction, your spouse must be an American citizen. This stipulation is in place because the IRS does not want a non-citizen spouse to go back to his or her country of citizenship with a tax-free inheritance in hand.
A base exclusion of $5 million was put into place for the 2011 calendar year. There was an inflation adjustment applied in 2012 that raised the exclusion to $5.12 million.
At the end of 2012, the American Taxpayer Relief Act of 2012 was enacted. The same exclusion was retained, and there have been ongoing adjustments since 2012. In 2013 the exclusion was $5.25 million, and throughout 2014 we have had an exclusion of $5.34 million.
The Internal Revenue Service has just announced the amount of the estate tax exclusion for 2015. Another adjustment has been applied to account for inflation, and it will raise the estate tax exclusion to $5.43 million in 2015.
Federal Gift Tax
When you start to think about the implications of the federal estate tax, you may decide that you will simply give gifts to your loved ones while you are living to avoid the tax. Unfortunately, this is not possible, because there is a federal gift tax.
The gift tax and the estate tax are unified, so the exclusion is a unified lifetime exclusion. It applies to taxable gifts that you give while you are living along with the value of your estate.
You can give unlimited gifts to your spouse while you are living without incurring any gift tax exposure, because the unlimited marital deduction extends to lifetime gift giving.
Schedule a Free Estate Planning Consultation
If you have questions about taxation or any other estate planning matter, our firm can help. We offer free consultations, and you can send us a brief message through this page to set up an appointment: St. Louis MO Estate Planning Attorneys.