Estate taxes can be a legitimate concern in estate planning. The good news is that a rather large portion of each person’s estate is allowed to pass to heirs and beneficiaries without being subject to estate taxes. Federal laws provide for what is sometimes referred to as the “unified credit.” This credit includes the federal estate and gift tax exclusions.
The Estate Tax Exclusion
The current estate tax exclusion is $5.34 million. Essentially, as long as your estate is less than $5.34 million, it will pass to your heirs tax free. With this exemption amount, it is likely that few individuals will have to worry about the estate tax. That has not always been the case, however. In 1997, the estate tax exemption was only $600,000. In 2008, the exemption had increased to $2,000,000. The estate tax exclusion, coupled with the gift tax exclusion, makes it easier for the average estate to avoid taxation.
This exclusion is also “portable,” which means that if your exemption amount of $5.34 million is not reached, your spouse can benefit from the remainder of that amount. In other words, if your estate is worth $1 million when you pass, your spouse will be able to use the remaining $4.34 million exemption to apply towards his or her estate.
The Gift Tax Exclusion
Anytime ownership of property is transferred from one individual to another who is paying less than the full value of the property, the IRS imposes a gift tax. There are very few exceptions, including tuition or medical expenses you pay on behalf of someone else. Also, gifts to spouses, qualified charities and political organizations are not taxable. There is an annual gift tax exclusion of $14,000 per recipient. This amount is doubled for spouses giving joint gifts. So, if you and your husband give your daughter a gift jointly, that gift can be up to $28,000 before any gift tax would be imposed.
Do I have to pay taxes on the portion of my estate that exceeds $5.34 million?
Not necessarily. If your estate is valued at more than $5.34 million, you can still reduce, or even eliminate, your estate tax liability through proper estate planning. In many cases, larger estates can be assessed less than 40% in estate taxes. One way to reduce your potential estate tax is through gifts, trusts and life insurance policies. Discuss your options with an Arkansas Estate Planning attorney.
What happens if I exceed the annual exclusion?
If you exceed the $5.34 million lifetime exclusion amount, then you will be required to pay 40% on the amount of your estate that exceeds that amount. However, making proper use of the marital deduction can also reduce this amount.
Under federal tax laws, married couples are allowed to give a gift of an unlimited amount to their spouse. This provides a way for married couples to transfer property to each other, while avoiding federal estate or gift taxes. When the spouse giving the property passes away, the value of the property that passes to the surviving spouse is deducted from the deceased spouse’s gross estate. The amount of this deduction is unlimited, as long as certain requirements are met.