Estate planning should be viewed as an ongoing process rather than a “one and done” affair. Things are always changing, and you should stay abreast of the current lay of the land at all times if you want to be optimally prepared.
When you are preparing a plan, you should be aware of potential exposure to the federal estate tax. This tax carries a 40 percent maximum rate, so it can really take a toll on the wealth that you are passing on to the next generation.
There is a federal estate tax exclusion that allows you to leave a certain amount of money to your loved ones free of taxation. We should point out the fact that you can leave unlimited assets to your spouse tax-free, but assets that you pass along to others are potentially subject to the estate tax.
Estate Tax Exclusion
To understand the current estate tax exclusion, you need to take a brief walk down memory lane. The estate tax was repealed for the 2010 calendar year because of provisions contained within the Bush era tax cuts. A tax relief act was passed at the end of that year that is called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Provisions contained within this act set the estate tax exclusion at $5 million in 2011 and 2012. An inflation adjustment upped the exclusion to $5.12 million during the 2012 calendar year.
This act expired at the end of 2012, but a new legislative measure was passed at the end of that year. It allowed for a continuation of the base $5 million exclusion with ongoing adjustments to account for inflation.
In 2013 the exclusion was $5.25 million, and throughout 2014 the exclusion has been $5.34 million.
Because this year is rapidly coming to a close, the Internal Revenue Service has announced that there will be another inflation adjustment applied for 2015. Next year, the estate tax exclusion will be $5.43 million.
Federal Gift Tax
In addition to the estate tax, there is also a federal gift tax. The gift tax and the estate tax are unified, so the $5.43 million exclusion that we will see in 2015 encompasses gifts that you give while you are living along with the bequests that you are leaving to your loved ones.
We should also point out the fact that there is an annual per person gift tax exclusion that sits apart from the unified lifetime gift and estate tax exclusion. The amount of this exclusion has been $14,000 during the 2014 calendar year.
This exclusion allows you to give up to $14,000 to any number of gift recipients within a calendar year before you would be forced to use a portion of your unified lifetime exclusion to give the gift in a tax-free manner.
The annual gift tax exclusion is sometimes increased to account for inflation, but according to reports, it will stay at $14,000 in 2015.
Taxation can take a heavy toll on your legacy. If you would like to discuss tax efficiency strategies with a licensed professional, send us a message through this page to set up a consultation: Grand Forks ND Estate Planning Attorneys.